Posted: March 16th, 2017
Assume that both air travel and travel by car are normal goods and you spend a fixed amount of income on both goods. Suppose that when the price of crude oil goes up by 30%, the price per mile of air travel goes up by 10% and the price per mile traveled by car goes up by 20%. Explain how the increase in the price of crude oil affects air travel and travel by car in terms of both the income effect and the substitution effect as well as the overall (net) effect.
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