Question

Diagrammatically explain concept of income effect and price effect show the manner in which price effect can be slipt up into income and substitution effects

Answer 1

Answer:

The substitution effect is the change in x* in going from A to C, while the income effect is the change in x* in going from C to B. To find C, use the original indifference curve and find the point of tangency with a fictitious budget constraint that has the new price ratio.

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