Unit 3.6 And 3.7

Question 1

What is the income effect

Answer 1

Increase in income has an individuals demand for a good because it expands the feasible set of purchases. When the price of the good changes this has an income effect because it expands or shrinks the feasible set

Question 2

What is the substitution effect

Answer 2

When the price of a good changes , the substitution effect is the change in the consumption of the gold that occurs because of the change in the goods relative price . The price change also has an income effect because it expands or shrinks the feasible set