Sheldon rides the bus and collects action figures. Suppose that he is consuming his optimal bundle....
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Sheldon rides the bus and collects action figures. Suppose that he is consuming his optimal bundle. Then, the price of an action figure decreases, while the price of a bus ride is unchanged. How does Sheldon's consumption of bus rides change if (1) a bus ride is an inferior good and (2) the substitution effect dominates for bus ride consumption? Explain why. Show the impact of the change in the price of action figures on Sheldon's consumption of bus rides, by decomposing it into the income and substitution effects. Carefully label the income effect, substitution effect and total effect on bus ride consumption on your graph (label the relevant consumption bundles, mark the sizes of each effect along the relevant axis, and use arrows to indicate the direction of each effect). Sheldon rides the bus and collects action figures. Suppose that he is consuming his optimal bundle. Then, the price of an action figure decreases, while the price of a bus ride is unchanged. How does Sheldon's consumption of bus rides change if (1) a bus ride is an inferior good and (2) the substitution effect dominates for bus ride consumption? Explain why. Show the impact of the change in the price of action figures on Sheldon's consumption of bus rides, by decomposing it into the income and substitution effects. Carefully label the income effect, substitution effect and total effect on bus ride consumption on your graph (label the relevant consumption bundles, mark the sizes of each effect along the relevant axis, and use arrows to indicate the direction of each effect).
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If a bus ride is an inferior good then an increase in income will lead to a decrease in the quantity of bus rides consumed In this case since the pric... View the full answer
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