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Unformatted text preview: price would cause you to eat more hamburgers and fewer hot dogs, according to the substitution effect. The income effect also affects buying decisions when there are two (or more) goods. When the price of hamburgers goes up, it makes you feel relatively poorer, so your tendency might be to buy fewer of both hamburgers and hot dogs. If you look at the combined results of the income effect and the substitution effect, the total effect is a little unclear. According to the income effect, an increase in the price of hamburgers decreases consumption of both hamburgers and hot dogs. According to the substitution effect, however, hamburger consumption drops, but hot dog consumption rises. Thus, while it is clear what happens to hamburger consumption, since both effects tend to cause a decrease, we cannot be sure what happens to hot dog consumption, since there is both an increase (substitution effect) and a decrease (income effect)....
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- Fall '08