Author Question: Differentiate between the income effect and the substitution effect of a fall in the price of a ... (Read 131 times)

yoroshambo · **on:** Jun 29, 2018

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 · **Reply #1 on:** Jun 29, 2018

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