Income and Substitution Effects in Demand Theory

<p>The overall change in quantity demanded due to a price change. (C)</p> Signup and view all the answers

<p>It occurs when changes in prices redistribute purchasing power. (A)</p> Signup and view all the answers

<p>x* = 8, y* = 2 (A)</p> Signup and view all the answers

<p>It becomes steeper. (C)</p> Signup and view all the answers

<p>(4, 4) (C)</p> Signup and view all the answers

<p>U = x^1/2 y^1/2 (A)</p> Signup and view all the answers

<p>It permits calculating Hicksian demand. (D)</p> Signup and view all the answers

<p>x is a normal good (A)</p> Signup and view all the answers

<p>Change in consumption when utility stays constant (D)</p> Signup and view all the answers

<p>Total Effect = Substitution Effect + Income Effect (D)</p> Signup and view all the answers

<p>It is interpreted as a decrease in consumer income (D)</p> Signup and view all the answers

<p>Income Effect = Total Effect - Substitution Effect (C)</p> Signup and view all the answers

<p>There is no income effect (C)</p> Signup and view all the answers

<p>Change in consumption of x when price changes (C)</p> Signup and view all the answers

<p>The best consumption choice given initial income (A)</p> Signup and view all the answers

<p>By taking the difference between substitution effect and total effect (B)</p> Signup and view all the answers

<p>Both correspond to the optimal utility given income (B)</p> Signup and view all the answers

<p>The indirect utility corresponding to a specific income (B)</p> Signup and view all the answers

<p>Higher prices lead to a decline in the utility level achievable (B)</p> Signup and view all the answers

<p>Marshallian and Hicksian demands (A)</p> Signup and view all the answers

<p>Choosing Ū based on utility received at original prices (A)</p> Signup and view all the answers

<p>The optimal consumption ratio with new prices (D)</p> Signup and view all the answers

<p>Substitution effect (A)</p> Signup and view all the answers

<p>Separating the total effect into substitution and income effects (D)</p> Signup and view all the answers

<p>x<em>m(p0x, py, I) - x</em>m(px, py, I) (D)</p> Signup and view all the answers

<p>Income effect adjusts consumption to maintain the same utility level. (C)</p> Signup and view all the answers

<p>Income level (C)</p> Signup and view all the answers

<p>Consumption of x decreases and y increases. (B)</p> Signup and view all the answers

<p>The consumption bundle that costs the least while maintaining the same utility. (C)</p> Signup and view all the answers

<p>x* = 8, y* = 2 (D)</p> Signup and view all the answers

<p>It becomes steeper, changing from 1/4 to 1. (B)</p> Signup and view all the answers

<p>Hicksian demand calculation. (D)</p> Signup and view all the answers

<p>Total utility decreases because the consumer can afford less. (C)</p> Signup and view all the answers

<p>It is expressed as $xh^<em>(px', py, Ū) - xh^</em>(px, py, Ū)$. (B)</p> Signup and view all the answers

<p>Their income must increase proportionally to price changes. (A)</p> Signup and view all the answers

<p>The increase in price exceeds the consumer's income. (A)</p> Signup and view all the answers

<p>The total cost of goods consumed. (B)</p> Signup and view all the answers

<p>It helps evaluate the derivative of demand with respect to price. (A)</p> Signup and view all the answers

<p>They will adjust their consumption level to fit their budget. (D)</p> Signup and view all the answers

<p>$U = 2$ (C)</p> Signup and view all the answers

<p>It reflects the best alternative consumption option without exceeding budget constraints. (B)</p> Signup and view all the answers

<p>x∗m (p0x , py , I) - x∗h (p0x , py , Ū ) (A)</p> Signup and view all the answers

<p>They are equal due to constant utility assumptions at initial income. (C)</p> Signup and view all the answers

<p>The comparison between original and new price demand functions. (B)</p> Signup and view all the answers

<p>It represents the optimal ratio of goods x and y at new prices. (D)</p> Signup and view all the answers

<p>The responsiveness of demand to the change in price. (C)</p> Signup and view all the answers

<p>It forces a reevaluation of utility given the new budget constraints. (A)</p> Signup and view all the answers

The change in quantity demanded of a good due to a change in its relative price, keeping utility constant.

The change in quantity demanded of a good due to a change in purchasing power caused by the price change.

The combined impact of the substitution effect and the income effect on quantity demanded.

The quantity of a good a consumer demands at a given price, income, and prices of other goods.

The quantity of a good a consumer demands at a given price, keeping utility constant.

A mathematical representation of consumer preferences, showing the level of satisfaction derived from consuming different combinations of goods.

A curve connecting all the combinations of two goods that provide the same level of utility to a consumer.

The line representing all the possible combinations of two goods a consumer can afford given their income and the prices of the goods.

A good whose demand increases as income rises.

A good whose demand decreases as income rises.

A formula that decomposes the total effect of a price change into the substitution effect and the income effect.

The change in consumption (x∗m) of a good when its price (px) changes, holding income (I) constant.

A function that measures the maximum utility a consumer can achieve given prices and income.

A measure of the satisfaction or happiness a consumer derives from consuming goods and services.

The combination of goods that maximizes consumer satisfaction given their budget.

When the price of a good changes, it affects both the quantity demanded and the optimal consumption bundle. This change can be broken down into two effects: Substitution Effect and Income Effect.

The combination of goods that maximizes consumer satisfaction given their income and the prices of the goods.

The overall change in the Marshallian demand for a good when its price changes. It includes the substitution effect and the income effect.

Breaking down the total effect of a price change into its two components: the substitution effect and the income effect. This allows us to understand the mechanisms driving the change in demand.

The value of the indirect utility function at the original prices and income. It represents the consumer's initial utility level.

This formula represents the substitution effect. It compares the optimal quantity of good x (xh*) before and after a price change (px0 to px), while keeping utility (Ū) constant.

This is the derivative of the Hicksian demand function with respect to the price of good x. It measures the instantaneous change in the optimal quantity of x as its price changes, keeping utility constant.

The point where the consumer maximizes their utility given their budget constraint. It's the ideal combination of goods they choose to buy.