Consumption Behavior of Sheldon: Bus Rides and Action Figures
How does Sheldon's consumption of bus rides change under different scenarios?
Suppose that Sheldon is consuming his optimal bundle. If the price of action figures decreases while the price of a bus ride remains unchanged, how will Sheldon's consumption of bus rides change if (1) a bus ride is an inferior good and (2) the substitution effect dominates for bus ride consumption? Explain the reasons behind the changes.
Sheldon's Consumption of Bus Rides Under Different Scenarios
When Sheldon is already at his optimal consumption bundle, a decrease in the price of action figures will result in a change in his consumption pattern. Let's analyze how Sheldon's consumption of bus rides changes under two scenarios:
1. When a bus ride is an inferior good, the income effect of the price decrease in action figures will increase Sheldon's real income. This will lead to higher consumption of both normal and inferior goods. However, the substitution effect will push Sheldon to consume less bus rides (inferior good) and more action figures.
Therefore, if bus rides are considered inferior goods, Sheldon's consumption of bus rides will decrease overall.
2. If the substitution effect dominates for bus ride consumption, Sheldon will tend to substitute away from bus rides and towards action figures due to the price decrease of action figures.