Demand notes

# Demand notes - 2 Label the Budget Line corresponding to the...

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An Individual Demand Curve is the graphical relationship between a Good’s price and the amount of the Good an individual will select when optimizing over her changing budget set. To determine the Income and Substitution Effects graphically, we use the following steps.2 1. Using graphical techniques, find the optimal bundle before the price change. Label the amount of Good 1 “xorig”. Identify the Indifference Curve passing through this optimal point and label it “ICorig”.
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Unformatted text preview: 2. Label the Budget Line corresponding to the new prices as “BLnew”. 3. Using graphical techniques, find the optimal bundle after the price change. Label the amount of Good 1 “xnew”. 4. Shift BLnew until it is tangent to ICorig. Label this shifted line “BLcompensated” and the amount of Good 1 in the tangency point “xsubs”. 5. The Substitution Effect is xsubs ? xorig. The Income Effect is xnew ? xsubs....
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