Unformatted text preview: expensive, so consumer opposite directions, so the total effect buys less pizza. on pizza consumption is ambiguous. I NCOME AND S UBSTITUTION E FFECTS W HEN THE P RICE OF P EPSI F ALLS Quantity of Pizza Quantity of Pepsi Income effect Substitution effect B A C New optimum I 1 2 Initial optimum New budget constraint Initial budget constraint Substitution effect Income effect Figure 21-10 I NCOME AND S UBSTITUTION E FFECTS . The effect of a change in price can be broken down into an income effect and a substitu-tion effect. The substitution effect—the movement along an indifference curve to a point with a different marginal rate of substitution—is shown here as the change from point A to point B along indifference curve I 1 . The income effect—the shift to a higher indifference curve—is shown here as the change from point B on indifference curve I 1 to point C on indifference curve I 2 ....
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.
- Spring '10