Explain the income and substitution effects.
What will be an ideal response?
The income effect occurs when people consume more of normal goods when the real income of a consumer increases as a result of a decrease in the price level. The substitution effect occurs when people consume more of a good that has become relative cheaper when its price has fallen.
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Which area represents the net gain to society? Should the reduction in output from QC to QE take place? Why or why not?
Use the following graph of the refined petroleum market to answer the questions below.
The "Anything-Can-Happen" theorem doesn't really imply "anything can happen" in a democratic process with multiple issues; rather, it implies that political outcomes can be manipulated, and some political institutions are better at constraining the degree to which this can be done than others. Do you agree or disagree with this statement? Why?
What will be an ideal response?
A model:
A) is often based on simplifying assumptions that are not necessarily true. B) can be tested without data or statistics. C) is a more complex representation of reality than a theory. D) can never be used to predict the future but helps explain the past.
The above table gives the demand schedule for Billy Bob's BBQ ribs. An increase in the price of a pound of ribs will lead to a decrease in total revenue when
A) demand is inelastic. B) the demand curve is vertical. C) the price increase occurs over the price range of 0 to $5. D) the price increase occurs over the price range of $5 to $10.