2. Income and substitution effects Manuel is an accountant who enjoys apples and pears. Suppose that the price of apples increases. As a result, even though Manuel purchases fewer apples, he actually purchases more pears than he would have before the price change. This phenomenon is known as the effect.

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2. Income and substitution effects
Manuel is an accountant who enjoys apples and pears. Suppose that the price of apples increases. As a result, even though Manuel purchases fewer
apples, he actually purchases more pears than he would have before the price change. This phenomenon is known as the
effect.
Transcribed Image Text:2. Income and substitution effects Manuel is an accountant who enjoys apples and pears. Suppose that the price of apples increases. As a result, even though Manuel purchases fewer apples, he actually purchases more pears than he would have before the price change. This phenomenon is known as the effect.
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An alteration in price of a given product creates two effects : substitution and income effects on its demand. This is because a price change not only motivates an individual to substitute his/her current consumption bundle but also make a change in his/her real income.

 

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