During October and November 2008, gasoline prices were falling dramatically making travel by car less expensive but air travel prices were as high as ever. If travel by car is less expensive, and income remains the same, describe the substitution and income effects that occur for travelling by car.

Question

Quizplus · Accepted Answer

When the price of gasoline falls, making car travel cheaper, the substitution effect leads consumers to substitute car travel for other more expensive forms of travel, like air travel. Additionally, the income effect suggests that with the same income, consumers can afford more travel overall, increasing car travel if it is a normal good.

During October and November 2008, Gasoline Prices Were Falling Dramatically