Question

Explain in words, in one paragraph, what the income and the substitution effects of a price...

Explain in words, in one paragraph, what the income and the substitution effects of a price decrease are. Then show in a diagram the income and substitution effects of a price decrease for a normal good. Label your diagram carefully, and explain in a couple of sentences what the diagram shows.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

When the price of a normal good decrease, real income (M/P) increases so people demand more. This is called income effect that is demand for the normal good is increased for increased purchasing power.

Substitution effect means when the price of a normal good deceases people will substitute other expensive goods with that cheaper good.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
the income and substitution effects of a price change explain what
the income and substitution effects of a price change explain what
1. Briefly explain the law of demand through the income and substitution effects, using a price...
1. Briefly explain the law of demand through the income and substitution effects, using a price increase as a point of departure. Explain the law of demand in terms of diminishing marginal utility.
Explain in your own words, in one paragraph, why every Giffen good is an inferior good,but...
Explain in your own words, in one paragraph, why every Giffen good is an inferior good,but not every inferior good is a Giffen good.
for each case, explain the direction of the substitution effect, income effect and total effect. -...
for each case, explain the direction of the substitution effect, income effect and total effect. - the price of good x, a normal good, increases - the price of good y, an inferior good, increases
Explain, in your own words and in one concise paragraph, what a “zeolite” is and how...
Explain, in your own words and in one concise paragraph, what a “zeolite” is and how it works.
1.) Use a supply and demand diagram to show the effects of a binding government price...
1.) Use a supply and demand diagram to show the effects of a binding government price ceiling on beef. Label your diagram and explain. What effect will this policy have on the price of pork. explain.
Amy has income of $M and consumes only two goods: composite good y with price $1...
Amy has income of $M and consumes only two goods: composite good y with price $1 and chocolate (good x) that costs $px per unit. Her util- ity function is U(x,y) = 2xy; and marginal utilities of composite good y and chocolate are: MUy = 2x and MUx = 2y. (a) State Amy’s optimization problem. What is the objective function? What is a constraint? (b) Draw the Amy’s budget constraint. Place chocolate on the horizontal axis, and ”expenditure all other...
A consumer has a demand function for good 2, ?2, that depends on the price of...
A consumer has a demand function for good 2, ?2, that depends on the price of good 1, ?1, the price of good 2, ?2, and income, ?, given by ?2 = 2 + 240/(??2) + 2?1. Initially, assume ? =40, ?2 = 1, and ?1 = 2. Then the price of good 2 increases to ?2′ = 3. a) What is the total change in demand for good 2? b) Calculate the amount of good 1 consumed at the...
Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore,...
Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied. Furthermore, assume that X is a normal good, Y is an inferior good, and the price of good Y decreases. Then, which of the following effects is known with certainty? 1. The income and substitution effects will have competing effects, leading to an indeterminate impact on the consumption of good Y. 2. The income and substitution effects will reinforce one another, leading to an overall...
Suppose the price of candy is initially $3 per candy in City A but that it...
Suppose the price of candy is initially $3 per candy in City A but that it may change by the next period. Draw the Marshallian demand curve for the demand for candy, and the associated Hicksian demand, as a function of the price of candy. Carefully label the axes, show how the two curves compare to each other, and label the point at which the curves cross. Suppose now that the price of candy increases to $5. Show on the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT