topic3_consumer behaviorII

The income and substitution effects reinforce each

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Unformatted text preview: l, the Hicksian demand curve is steeper. • When good X is inferior, the Marshallian demand curve is steeper. • The income and substitution effects reinforce each other ff (both are negative) • The income and substitution effects work in opposite ff direction (inc +ve, sub -ve). 29 4.Inflation Indexes Indexes • Inflation the increase in the overall price level over time. – nominal price the actual price of a good. – real price the price adjusted for inflation. price the price adjusted for inflation • How do we adjust for inflation to calculate the real price? 30 Inflation Indexes (cont Inflation Indexes (cont.) • Consumer Price Index (CPI) – measure the cost of a standard bundle of goods for use in comparing prices over time. – We can use the CPI to calculate the real price of a hamburger over time hamburger over time. – In terms of 2010 dollars, the real price of a hamburger terms of 2010 dollars the real price of hamburger ( sold at ¢15 in 1955) was: CPI for 2010 2010 CPI for 1955 price of a burger 218 15 $1.22 26.8 31 Calculating Inflation Indexes Calculating Inflation Indexes Between period 1 and 2 • Single good x CPI 2 px p1 x • Multiple goods (two goods x and y) CPI 2 x 1 x p p 2 py x 1 y p y Weighte...
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