8. Ann lives in Princeton, New Jersey, and commutes by train each day to her job

Question

8. Ann lives in Princeton, New Jersey, and commutes by train each day to her job in New York City (20 round trips per month). When the price of a round trip goes up from $10 to $20, she responds by consuming exactly the same number of trips as before, while spending $200 per month less on restaurant meals. a.Does the fact that her quantity of train travel is completely unresponsive to the price increase imply that Ann is not a rational consumer? b.Explain why an increase in train travel might affect the amount she spends on restaurant meals.

Explanation / Answer

a. Does the fact that her quantity of train travel is completely unresponsive to the price increase imply that Ann is not a rational consumer? Even at twice the original price, the marginal utility per dollar of the 20 th train trip may be higher than the corresponding ratio for any other good that Ann might consume, in which case she would be perfectly rational not to alter the number of trips she takes. After all, missing a trip would be to miss a whole day’s work.    b. Explain why an increase in train travel might affect the amount she spends on restaurant meals. The higher price of train tickets makes Ann poorer. The income effect of the price increase is what leads to the reduction in the number of restaurant meals she eats.

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