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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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Most popular questions from this chapter

Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do best than if each worker tries to do everything from appetizer to dessert.

Suppose we extend the circular flow model to add imports and exports. Copy the circular flow diagram onto a sheet of paper and then add a foreign country as a third agent. Draw a rough sketch of the flows of imports, exports, and the payments for each on your diagram.

Give the three reasons that explain why the division of labor increases an economy’s level of production.

Why do indifference curves slope down?

How does the appearance of positive slope differ from negative slope and from zero slope?
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