LectureAssignment08

LectureAssignment08 - 1 ECONOMICS 100 Lecture Assignment #...

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ECONOMICS 100 Lecture Assignment # 8 (Income and Substitution Effects) Source: LR11, Chapter 6, Appendix, page 151 onwards; LR10, Chapter 6, Appendix, page 153 onwards. Lecture is more extensive. Verbiage on SE and IE can be found in the main part of Chapter 6, LR 11pages 129-134; LR10 pages 138-141. 1. Income and Substitution Effects 1.1 Suppose the price of X falls. Using Indifference Theory (with normally shaped indifference curves), separate the change in the quantity demanded as a result of the lower price into two categories: an "income effect" (IE) related to the notion that purchasing power has increased since a price is lower, and a "substitution effect" (SE) related to the notion that X is now relatively cheaper. 1.2 Relate the direction of the income effect to whether a good is normal or inferior. Show that the substitution effect is always "negative" (i.e., when the price of X rises / falls, the quantity of X consumed because of the substitution effect alone falls / rises.) 1.3
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LectureAssignment08 - 1 ECONOMICS 100 Lecture Assignment #...

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