one problem is that as you drink more booze, your tastes change (as your judgement falters). As a result, it sure seems that some of my students get _increasing returns_ to drinking, until they reach the tipping point (tippling point?) and bow down before the porcelain god. JD
Michael wrote, > Let me see if I have this right: if the price of champagne > increases and I switch to beer, then substitution dampens > the effect of inflation. Eric writes:> I believe what is involved is the BLS distinguishing between the income and substitution effects of price changes. As the price of champagne increases you are hurt as you must now guzzle beer instead of champagne. This saddens you; you are on a lower indifference curve. Yet to get you back to the original indifference curve you were on (before the increase in the price of champagne) you don't have to give given enough income to return you to the exact same consumption bundle you had before. Because of the relatively higher price of champagne you now _prefer_ to consume more beer than before. Due to the curvature of the indifference curve the income you need to get to the same indifference curve as before is less than needed to get you to the exact same consumption bundle. This latter factor is how the new approach would lead to a lower rate of inflation (measured by how much income you need to get to the same indiffence curve as before). This is what the BLS would say, I believe.< Eric neoclassical hat in hand.
