Case where Donuts are a Gross Complement to Coffee I’m still a Dunkin’ Donuts Junkie. I still spend all of my income on coffee and donuts. I still earn $100 per week. I still spend it all on coffee and donuts and I still buy 25 donuts and 25 coffees every week. Once again, let’s assume that the price of donuts has always been $2 and the price of coffee has always been $2. Once again, let’s assume that when I wake up tomorrow, the price of donuts will fall to $1. Once again, my money income won’t change, but my real income (purchasing power) will be higher since I’ll now be able to purchase more coffee and more donuts. As before, the relative price of donuts will also fall from donut coffee 1 $2/coffee $2/donut to donut coffee 5 .0 $2/coffee $1/donut so once again I’ll now have to give up less coffee to eat more of my favorite donuts. The difference this time is that I’m going to increase my consumption of both coffee and donuts after the price of donuts falls. substitution effect
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.