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The substitution effect is the effect of a change in

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The substitution effect is the effect of a change in price on the quantity bought when the consumer (hypothetically) remains indifferent between the original situation and the new one For a normal good, the income effect reinforces the substitution effect For an inferior good, the income effect is negative and a lower price does not always lead to an increase in the quantity demanded The lower price has a substitution effect that increases the quantity demanded, but a negative income effect that reduces the demand for the inferior good The income effect works in the opposite direction to and offsets the substitution effect to some degree If the negative income effect exceeded the positive substitution effect, the demand curve would slope upward Changes in prices and incomes change the best affordable choices and change consumption patterns What are work-leisure choices? The more hours we spend on leisure, the smaller is our income The relationship between leisure and income is described by an income-time budget line Gets onto the highest possible indifference curve by making marginal rate of substitution between income and leisure equal to wage rate Leisure is a normal good, so as incomes increase, people demand more leisure The higher wage rate has both a substitution effect and an income effect
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