Assignment 2_PaulU - Assignment 2 1 ,,theamountofthat .For...

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Assignment 2 1. According to the law of demand, when the price of a good changes, the amount of that  good that consumers are willing and able to buy changes in the opposite direction.  For  example, when the price of Coke rises, the quantity demanded of Coke falls (all else  equal). Changes in price can affect buyers' purchasing decisions; this effect is called the  income effect. Increases in price, while they don't affect the amount of your paycheck,  make you feel poorer than you were before, and so you buy less. Decreases in price  make you feel richer, and so you may feel like buying more. What if we're looking at  two goods at once? For instance, a fast food chain sells hamburgers and hot dogs. If  the price of hamburgers goes up, but the price of hot dogs stays the same, you might  be more inclined to buy hot dog. This tendency to change your purchase based on  changes   in   relative   price   is   called   the   substitution   effect.   When   the   price   of  hamburgers goes up, it makes hamburgers relatively expensive and hot dogs relatively  cheap, which influences you to buy fewer hamburgers and more hot dogs than you  usually would. Likewise, a decrease in hamburger price would cause you to eat more 
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This note was uploaded on 09/27/2011 for the course FINACE 6710 taught by Professor Homaifar during the Spring '11 term at Middle Tennessee State University.

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Assignment 2_PaulU - Assignment 2 1 ,,theamountofthat .For...

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