LL6 INCOME & SUBTITUTION SLIDES

LL6 INCOME & SUBTITUTION SLIDES - ECON 306 CLASS...

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© Charles R. Hulten 2008 ECON 306 CLASS HANDOUNT INCOME AND SUBSTITUTION EFFECTS AND THE COMPENSATING VARIATION THE INCOME AND SUBSTITUTION EFFECTS OF A PRICE CHANGE HOW INCOME AND SUBSTITUTION EFFECTS DETERMINE THE SHAPE OF THE DEMAND CURVE THE COMPENSATING VARIATION AS A METRIC OF LIVING STANDARDS COST-OF-LIVING ADJUSTMENTS AND THE SUBSTITUTION BIAS IN THE CPI
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© Charles R. Hulten 2008 0 10 3 5 4 5 e X 1 U 1 B 1 e 2 B 2 U 2 Y PCC e 2 e 1 2.00 35 P X X e 1 e 2 4 5 10 P Y Y 1.00 4 m 1.50
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© Charles R. Hulten 2008 © Charles R. Hulten 2008 THE TOTAL PRICE EFFECT FROM E1 TO E2 HAS TWO PARTS: E1 TO Ec, Ec TO E2 0 10 3 5 4 5 e X 1 U 1 B 1 e e 2 c B 2 B c U 2 Y PCC 6 3.5 13 THE SUBSTITUTION EFFECT E1 TO Ec MEASURES THE CHANGE IN X (AND Y) PURELY BECAUSE X HAS BECOME MORE EXPENSIVE RELATIVE TO Y THE INCOME EFFECT Ec TO E2 MEASURES THE CHANGE IN X AND Y BECAUSE THE PRICE INCREASE IN X HAS CUT REAL SPENDING POWER THE HIGHER THE DEGREE TO WHICH THE GOOD CAN BE SUBSTITUTED
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This note was uploaded on 04/12/2009 for the course ECON 306 taught by Professor Cramton during the Spring '06 term at Maryland.

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LL6 INCOME & SUBTITUTION SLIDES - ECON 306 CLASS...

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