Explanation A budget constraint will represent all the possible combinations of two commodities that an individual can consume at the given market prices and with all his income in hand. The indifference curve is the graphical representation of different combinations of two commodities that provide the same level of satisfaction to the consumer. Since the level of satisfaction is same at every point, the consumer will be indifferent amongst them. The point where the budget constraint and the indifference curves are tangent is known as the point of maximum utility to the consumer. Here we can represent the budget constraint of the consumer and two indifference curves as follows: Here, the consumer is in its initial budget constraint BC 1 and the BC 1 is tangent to the I1 indifference curve...

The income effect and the substitution effect.

Principles of Microeconomics (MindTap Course List)

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ISBN: 9781305971493

Author: N. Gregory Mankiw

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Chapter 21.3, Problem 3QQ

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The income effect and the substitution effect.

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