Using a graph, explain both the substitution effect and income effect that result from an increase in the price of a normal good.
What will be an ideal response?
Refer to Figure 6.7. The initial budget line is shown by L1. An increase in the price of good X will cause the budget line to pivot to L2. The substitution effect is shown by drawing a new budget line with the slope of budget line L1 tangent to the initial indifference curve. This is shown by the movement from point A to point C. The income effect is then shown by the movement from point C to point B.
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It is in society's best interest that the MC of the last unit produced of a good is equal to its MU
a. True b. False Indicate whether the statement is true or false
The state is considering adding a satellite campus to its major university. How can marginal analysis assist, even though the university does not attempt to maximize profits?
The value of intermediate goods is not included in the calculation of GDP to avoid the problem of
a. depreciation. b. inflation. c. double counting. d. transfer payments.
The Invisible Hand Principle suggests that
a. market prices direct individuals to produce more goods. b. individuals pursuing their own interests detract from the economic well-being of society. c. there should be stronger governmental initiatives to ensure cooperation for the betterment of society. d. market forces tend to channel the actions of self-interested individuals into activities that promote the general betterment of society.