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Author Question: Differentiate between an income effect and a substitution effect. What will be an ideal ... (Read 58 times)

tfester

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on: Jun 29, 2018
Differentiate between an income effect and a substitution effect.
 
  What will be an ideal response?

Question 2

If revenue in the short run is sufficient to offset variable costs but not all fixed costs, what should the firm do?
 
  What will be an ideal response?


tandmlomax84

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Reply #1 on: Jun 29, 2018
Answer to Question 1

Ceteris paribus, the income effect of a price decrease increases the opportunity to buy more of all goods, whereas the substitution effect of a price decrease makes the good become relatively cheaper. In the case of a price increase, the income effect reduces the opportunity to buy all goods, whereas the substitution effect makes the good become relatively more expensive.

Answer to Question 2

The firm should continue to produce in the short run but exit in the long-run if it expects economic losses to continue.


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