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Unformatted text preview: variable. Set utility equal to your original utility level (before the price change) and solve for your variable. 5. Go back to your equation from step 2 to solve for the other variable. These values give you the decomposition bundle. 6. The substitution eect is given by the change from your original bundle to this decomposition bundle. 7. The income eect is given by the change from the decomposition bundle to the nal bundle. 8. The nal bundle is found by nding the optimal bundle for the new prices (see above) and the new budget constraint equation. Remember: the substitution eect is always negative for a price increase (since relative price and quantity are negatively related). The direction of the income eect depends on whether the product is a normal or inferior good (with more money, are you going to buy more or less of the good). 1...
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This note was uploaded on 03/18/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.
- Spring '08