Differentiate between the income effect and the substitution ...

[yoroshambo]

Differentiate between the income effect and the substitution effect of a fall in the price of a good.
 
  What will be an ideal response?

Question 2

Failing to be fully informed may be efficient if information
 
  A) is free.
  B) is scarce.
  C) is subject to increasing returns.
  D) has no opportunity cost of production.

[Anonymous]

Answer to Question 1

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.

Answer to Question 2

B

[yoroshambo]

Excellent

[vickybb89]

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