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Chapter 1: Q 7RQ. (page 9)

What is income effect?

Short Answer

Expert verified

The income effect encourages a utility-maximizer to buy more of both goods if utility rises or less of both goods if utility falls.

Step by step solution

01

Step 1. Meaning of income effect

The income effect is the reduction in buying power that causes a shift from the higher indifference curve to lower indifference curve,with the relative price remain unchanged. The income effect encourages a utility-maximizer to buy more of both goods if utility rises or less of both goods if utility falls.

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