Topic Two

Question 1

what happens when the price of x increases in term of income and substution effect

Answer 1

SUB: x is relatively more expensive (y is relatively less expensive/cheaper) - buy less of x and buy more of y

INC: consumers purchasing power decreases (real income decreases: if x is normal- buy less of x : if x is inferior buy more of x

Question 2

Marginal Rate of Substution

Answer 2

MRS=-mux/muy the rate that the consumer is willing to give up/trade one good for another

Question 3

Marginal Rate of transformation

Answer 3

MRT=-px/py Slope of the budget constraint.