Into what two effects can we divide the effect of a price change?
What will be an ideal response?
A price change can be divided into a substitution effect and an income effect. The substitution effect is the effect of a change in price on the quantity bought when the consumer remains indifferent between the original situation and the new situation. The income effect is the effect of a change in income sufficient to get the consumer to the highest indifference curve that is affordable on the new budget line reflecting the price change.
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The negative of the slope of the isoquant indicates the ___________________________
Fill in the blank(s) with the appropriate word(s).
The marginal principle states that one should
A) increase the level of an activity if the marginal benefit exceeds its marginal cost. B) if possible, pick the level at which the marginal benefit equals the marginal cost. C) decrease the level of an activity if the marginal cost exceeds the marginal benefit. D) all of the above