microbook_3e-page79 - In the end the only thing that...

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In the end, the only thing that changed was the price of beer. The substitution effect holds the professor’s real income constant. The income effect holds the relative price of beer constant. Now, let’s examine the professor’s consumption of beer before and after the price change. Does the substitution effect allow him to consume more beer? Does the income effect allow him to consume more beer? On a new graph, draw the professor’s demand curve by connecting two points – one point should represent initial price of beer and quantity of beer demanded and the other point should represent the new price of beer and quantity of beer demanded. Finally, let’s examine the professor’s consumption of pizza before and after the price of beer changes. Does the substitution effect allow him to consume more pizza? Does the income effect allow him to consume more pizza? Notice that – in the case of beer – the income and substitution effects move in the same direction.
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