Income effect of the price change on quantity demanded

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Reference no: EM13892132

You own a rock climbing gym. Ryan is one of your customers. Ryan receives utility from rock climbing and pizza (Ryan exhausts his income in each period on the two goods). Ryan has $100 of income. At a price of $20, Ryan buys 0 sessions. At a price of $10, Ryan buys 5 sessions. At a price of $5, Ryan buys 12 sessions. At a price of $0, Ryan buys 40 sessions. Previously you ran a promotion at $5 a session and Ryan purchased 10 sessions. However, during that promotion, Ryan’s income was $75, instead of $100. The price is currently set at $10 per session. Suppose you change the price of a rock climbing session from $10 to $5. Assume that nothing has changed about Ryan’s preferences between the promotion and later price change.

a. What is the income effect of the price change on quantity demanded?

b. What is the substitution effect of the price change on quantity demanded?

Reference no: EM13892132

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