When we change the price of a good, the total effect (TE) in quantity demanded is...
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When we change the price of a good, the total effect (TE) in quantity demanded is caused by two separate effects, the substitution effect (SE) and income effect (IE). Therefore, we have: TE = SE + IE A. Explain with your own words what the SE and IE are. B. Draw two stacked graphs showing the change in the optimal consumption bundle, and the SE and IE for a normal good x when its price decreases from px' to px". C. What would change if x were an inferior good? When we change the price of a good, the total effect (TE) in quantity demanded is caused by two separate effects, the substitution effect (SE) and income effect (IE). Therefore, we have: TE = SE + IE A. Explain with your own words what the SE and IE are. B. Draw two stacked graphs showing the change in the optimal consumption bundle, and the SE and IE for a normal good x when its price decreases from px' to px". C. What would change if x were an inferior good?
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Answer A Substitution Effect SE Imagine you typically buy good X but the price suddenly increases This makes X relatively more expensive compared to other goods The substitution effect refers to how y... View the full answer
Related Book For
Macroeconomics Principles Applications And Tools
ISBN: 9780134089034
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
Posted Date:
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