Differentiate between the income effect and the substitution effect of a fall in the price of a good
What will be an ideal response?
A fall in the price of a good makes consumers feel wealthier, which allows them to consume more of all goods. This is referred to as the income effect of a price fall and is represented by a movement to a higher indifference curve. Also, when the price of a good falls, the good becomes relatively cheaper compared to other goods. As such, consumers have a tendency to substitute other goods with this good. This is referred to as the substitution effect and it is represented by a movement along the original indifference curve.
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Refer to Figure 9.3. If the market is in equilibrium, total consumer surplus is
A) $1. B) $3. C) $200. D) $400. E) $600.
When a developing country relies on import substitution,
a. it sacrifices the gains from specialization and comparative advantage b. replaces low-cost foreign goods with high-cost domestic goods c. domestic producers, shielded from foreign competition, usually fail to become efficient d. other countries often retaliate with their own trade restrictions e. All of the answers are correct
A collective-action problem is a situation in which:
A. a group of people stand to gain from an action that is not rational for any of the members to undertake individually. B. people are reluctant to voluntarily pay for goods and services because they believe their individual contribution will not make a difference. C. people are often reluctant to voluntarily pay for goods and services that provide benefits for everyone, even for those who don't pay. D. a small group of individuals gains power that sways the decisions of society to their personal gain at the expense of the larger society.
Higher rates of productivity growth are most closely associated with higher rates of
A. consumer spending. B. investment spending. C. government spending. D. import spending.