Differentiate between the income effect and the substitution effect of a fall in the price of a good
What will be an ideal response?
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.
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Refer to the production possibilities frontier in the figure above. If the country moves from point a to point c, the opportunity cost of the move is
A) 30 million capital goods. B) 20 million capital goods. C) 10 million capital goods. D) 10 million consumption goods.
The final consumer demand for chicken (normal good) in China will NOT shift if
A. consumer income decreases. B. more consumers are present in the market. C. the price of chicken decreases. D. either A or B occurs.