Micro Economics For Today
10th Edition
ISBN: 9781337613064
Author: Tucker, Irvin B.
Publisher: Cengage,
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Chapter P2, Problem 12KC
To determine
The example for the substitution effect.
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Question 3 Maureen spends her budget on pizza and salad. Suppose that the price of salad increases, as a result, she decreases her consumption on salad. (1) Discuss the substitution effect due to the price increase. Will Maureen consume more or less salads due to the substitution effect? (2) Discuss the income effect due to the price increase. Will Maureen consume more or less salads due to the income effect? Discuss briefly, with max. 5-6 lines for each effect. You can also draw a graph if it helps you.
When there is a change in price, there is an income effect and a substitution effect. Which is larger? The substitution effect or the income effect? Explain
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