This preview shows page 1. Sign up to view the full content.
Unformatted text preview: Case where Wine is a Gross Substitute for Beer I’ll use beer and wine to illustrate gross substitutes, but the analysis will be identical to the previous cases. This time I’m an alcoholic. I still earn $100 per week, but this time I spend it all on beer and wine and I buy 25 bottles of wine and 25 bottles of beer every week. To preserve the similarity, let’s assume that the price of beer has always been $2 and the price of wine has always been $2. Once again, let’s assume that tomorrow the price of wine 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 wine and more beer. Similarly, the relative price of wine will fall from wine beer 1 $2/beer $2/wine to wine beer 5 . $2/beer $1/wine so once again, I’ll now have to give up less beer to drink more of my favorite wine. Compared with the previous cases, the difference this time is that I’m going to increase my consumption of...
View Full Document
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.
- Fall '10