Economics 6

CFA Level I Economics
#1

A man earns $3,000 per month and allocates $300/month for bus travel to visit his children three times per month. The bus company lowers the cost such that he can now take four trips a month for $320, which he decides to do. His decision to visit his children more often is most likely due to which economic effect?

  1. Income effect alone
  2. Substitution effect alone
  3. Income and substitution effects combined

My Understanding:
The income effect is purchasing more of a good when its price falls, it leads to more purchasing power (real income) of that good.

substitution effect Purchasing more of a good when its price falls.
so the solution to this is option 1?
or m I skipping any key word.
Thanks in advance!!

#2

The substitution effect involves (at least) two items that can be purchased, and which are substitutes for each other.

Does this question offer a substitute for bus travel?

#3

No, Question doesnot have any subsitute of bus

#4

So . . . does the substitution effect apply?

#5

You are right even i also thought of the same way. if nothing is given in substitution so substitution effect will not apply. but answer says that both effect is applicable.
Reason : Substitution Effect says that buying more good when it price falls and spends more portion of the income.

source of question: CFA curriculum