Production Notes - 1 211-1 Week of Notes Weve decomposed...

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211-1 Week of 10-13-2014 Notes We’ve decomposed the total change in B (the total effect) into 1) the change in B due to the relative price change—the sub effect and 2) the change in B due to the real income change—the income effect. Sub Effect is always negative. That is, there is an inverse relationship between P and consumption. As P B , consume more B due to diminishing MRS. The Income Effect can be positive or negative. In the example above it’s positive since we considered a normal good. Learn: For a normal good, D curves must slope downward; i.e., the sub and income effects reinforce each other. INFERIOR GOOD Drawing Tip: Y BL 1 BL S BL 2 X (OVER) 1
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Gas Tax w/ Rebate Plan: Excise tax on gas of $t per gallon. Concern: Tax creates a burden so return tax dollars collected in lump-sum rebate. Argument made against: So, is the argument against the plan correct? Y B NR B R B 1 Gas (gallons) B 1 is the initial budget line prior to the excise tax.
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  • Spring '14
  • EricSchulz
  • Tax w/ Rebate, change—the sub effect

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