Enlighten whether the effects are income or substitution when the cost of living increases and when there is a reduction in the purchasing power of your income. Concept Introduction: Income effect: This is described as the change in the quantity of goods and services due to a change in the income of the people. Substitution effect: This is an economic theory in which when the price rises or income of the people falls, people will substitute the dearer goods with less expensive alternative goods.

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05- Income and Substitution Effects Question 2

Answer 1

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Chapter 12, Problem 1.2PA

To determine

Enlighten whether the effects are income or substitution when the cost of living increases and when there is a reduction in the purchasing power of your income.

Concept Introduction:

Income effect:

This is described as the change in the quantity of goods and services due to a change in the income of the people.

Substitution effect:

This is an economic theory in which when the price rises or income of the people falls, people will substitute the dearer goods with less expensive alternative goods.

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05- Income and Substitution Effects Question 2

Question 28 The marginal rate of substitution measures the: extra utility that a consumer derives from successive units of a product. consumer's willingness to substitute one product for another so that total utility will remain constant. magnitude of the substitution effect. total utility received by a consumer when equilibrium is achieved.

2. Gorgeousleny purchased a combination of 15 breads and 5 juices with her income of P150 and price of bread is P6 and price of juice is P12. She proudly showed this to her mom, and to her dismay her mom said that she likes more juices than bread since its summer season. While on her way home she lost the receipt, but fortunately she can still receive store credit based from the total value of products. While approaching the customer service representative , she thought of this what if she sticks with her original plan of buying bread alone with no juice and vice versa. At the moment all juices in the store is 50% off. Draw the graph showing the budget constraints arise from endowments. a. ) Measure the qty. of bread on the vertical axis and the qty. of juice on the horizontal axis. Label both graph with its corresponding points, pt. A for bread and point B for juice. the combination of bread and juice label it as point C. b.) For both graph, What is the slope from point C…