E Compare Substitution and Income Effects Flashcards Preview

L1 14 Demand and Supply Analysis: Consumer Demand > E Compare Substitution and Income Effects > Flashcards

Flashcards in E Compare Substitution and Income Effects Deck (2)
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1
Q

The substitution effect always increases the consumption of a good that has fallen in price

A

Decreased Px moves consumption toward more Goodx

Consumption increases when Sub and Inc effects are positive (X –>)

Sub is positive, Inc is negative but smaller than sub, consumption still increases (X –>)

Sub is positive, inc is neg and larger than sub, consumption decreases (Income effect takes over)

2
Q

The income effect can either increase or decrease consumption of a good that has fallen in price

A

Ex: Law of Demand violated: -Inc effect > Sub, more good Y even on higher budget constraint