Question

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.

Answer 1

Answer:

No; Because the higher price of round trips has reduced her purchasing power

Explanation:

Anne commutes by train each day to her job. The price of a round trip increased to $20 from $10. Though, the number of round trips consumed remains the same.

With an increase in the price of round trips instead of reducing the number of round trips, she consumes the same but reduces spending on restaurant meals.

This does not make Anne irrational as a consumer. The marginal utility of each dollar spent on round trips is still higher than other goods Anne consumes, so she is not reducing the consumption of round trips.

However, the increase in price has reduced her purchasing power. As a result, she is reducing the consumption of restaurant meals which is probably providing the lower marginal utility of each dollar spent on it.