Discuss the substitution and real-income effects of a price decrease
What will be an ideal response?
The substitution effect of a price decrease is for people to substitute cheaper goods for more expensive goods. So, a consumer will purchase more of a good whose price fell and less of a substitute good. A price decrease raises the real income of the consumer, so the consumer will want to buy more of all goods including the good whose price fell. The more important effect is the substitution effect since the change in real income from a price change of a single good is usually very small.
You might also like to view...
If, at a firm's projected sales level, the marginal cost is $125, the average cost is $150 and the markup is 20 percent, then its selling price is
A) $125. B) $150. C) $165. D) $180.
Statutory incidence of a tax deals with
A. the amount of revenue left over after taxes. B. the amount of taxes paid after accounting for inflation. C. the person(s) legally responsible for paying the tax. D. the amount of tax revenue generated after a tax is imposed.
If investment spending increases by $1 million, then the aggregate demand curve shifts
A) rightward by less than $1 million. B) leftward by more than $1 million. C) rightward by more than $1 million. D) rightward by $1 million. E) leftward by less than $1 million.
What is the role of the Federal Deposit Insurance Corporation?
a. To insure bank deposits b. To act as a lender of last resort c. To establish regulations for commercial banks d. To monitor the actions of commercial banks e. To insure the assets of commercial banks