Question

Authors Elizabeth Warren and Amelia Warren Tyagi argue in their book The Two Income Trap that the rising prices of housing, medical care, and colleges are putting even two income earner families in a budget squeeze. How do you think families respond to this squeeze, in terms of substitution effects and income effects?

Answer 1

Substitution effect: as price of housing, medical care, colleges are increased people will tend to decrease their demand. Even in a family there are two income earner, they will decrease their demand for housing, education, and better health

Income effect: as there are two income earners they will demand more. Because they have more income in hand.

But here substitution effect dominates income effect so even two income earner families are facing budget squeeze. So the families decrease their demand as they have no enough budget to fulfill their demand.