Differentiate between an income effect and a substitution effect
What will be an ideal response?
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.
You might also like to view...
What is the relationship between the aggregate planned expenditure curve and the aggregate demand curve? Explain the relationshi
What will be an ideal response?
Looking at the average tariff rate in the United States since 1930, we see that
A) tariffs have trended downward for most of the period. B) tariffs were made illegal in the United States in 1955. C) tariff levels have remained high, at over 50 percent throughout the period. D) while we talk about free trade, tariff levels have risen over the last 30 years. E) at first tariffs declined, but have recently risen.