Explain the income and substitution effects of an increase in the price of one good on an individual's consumption choice
What will be an ideal response?
Since an increase in the price of one good reduces a consumer's purchasing power (in other words, the consumer feels less wealthy), she is likely to buy less of both goods. This is called the income effect of a price increase. Also, since the increase in price will make the good more expensive relative to other good, the quantity purchased of that good will fall. This is called the substitution effect of the price increase.
A
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Discretionary monetary policy is defined as policy
A) that is based on the judgments of policymakers. B) for which the markets make all decisions. C) that is pursued regardless of the current state of the economy. D) that responds to a changing economy with predetermined rules. E) for which the policymaker always publicizes the policy as extensively as possible because its effectiveness depends on the public's knowledge of the policy.
Marginal cost
A) increases as more is produced. B) remains constant as more is produced. C) decreases as more is produced. D) decreases as marginal benefits decrease.