|Question||We continue with the adventures of Agatha, from the previous problem. Just after the price change from $.10 per mile to $.05 per mile for second-class travel, and just before she had bought any tickets, Agatha misplaced her handbag. Although she kept most of her money in her sock, the money she lost was just enough so that at the new prices, she could exactly afford the combination of first- and second-class tickets that she would have purchased at the old prices. How much money did she lose? $50. On the graph you started in the previous problem, use black ink to draw the locus of combinations of first- and second-class tickets that she can just afford after discovering her loss. Label the point that she chooses with a C. How many miles will she travel by second class now? 1,000.
Finally, poor Agatha finds her handbag again. How many miles will she travel by second class now (assuming she didn’t buy any tickets before she found her lost handbag)? _____. When the price of second class tickets fell from $.10 to $.05, how much of a change in Agatha’s demand for second-class tickets was due to a substitution effect? _____. How much of a change was due to an income effect? _____.