Question

5x=10
(any two).
a) Explain Engel's curve. How can you derive it?
b) What are the basic economic problems faced by an economic system?
c) Explain clearly income effect, substitution effect and price effect.​

Answer 1

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The Engel Curve can be derived from the Income Expansion Path. Each budget constraint in the Income Expansion Path provides the income. The amounts of Good X consumed at the points of consumers' optimum on the budget constraint provide the quantity of Good X consumed at those income levels.

Economic systems as a type of social system must confront and solve the three fundamental economic problems: What kinds and quantities of goods shall be produced, "how much and which of alternative goods and services shall be produced?"

The income effect expresses the impact of increased purchasing power on consumption, while the substitution effect describes how consumption is impacted by changing relative income and prices. Some products, called inferior goods, generally decrease in the consumption whenever incomes increase