To remain in consumer optimum, a price decrease requires V in consumption. A price increase requires in consumption. Each change in price has a substitution effect. When the price of a good the consumer V in favor of that relatively cheaper good. Each change in price also has a real-income effect. When price V, the consumer's real purchasing power increases, causing the consumer to purchase V of most goods. Assuming that the principle of diminishing marginal utility holds, the demand curve must slope downward. The price of water is lower than the price of diamonds because people consume V water than diamonds, which results in a marginal utility of water compared with the marginal utility of diamonds.
To remain in consumer optimum, a price decrease requires V in consumption. A price increase requires in consumption. Each change in price has a substitution effect. When the price of a good the consumer V in favor of that relatively cheaper good. Each change in price also has a real-income effect. When price V, the consumer's real purchasing power increases, causing the consumer to purchase V of most goods. Assuming that the principle of diminishing marginal utility holds, the demand curve must slope downward. The price of water is lower than the price of diamonds because people consume V water than diamonds, which results in a marginal utility of water compared with the marginal utility of diamonds.
Chapter10: Consumer Choice Theory
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:To remain in consumer optimum, a price decrease requires
V in consumption. A price increase requires
in consumption.
Each change in price has a substitution effect. When the price of a good
the consumer
V in favor of that relatively cheaper good.
Each change in price also has a real-income effect. When price
V, the consumer's real purchasing power increases, causing the consumer to purchase
V of most goods. Assuming that the principle of diminishing
marginal utility holds, the demand curve must slope downward.
The price of water is lower than the price of diamonds because people consume
V water than diamonds, which results in a
marginal utility of water compared with the marginal utility of diamonds.
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