Graphically decompose the total effect of the price

Reference no: EM132200810

Question: Suppose an individual's price consumption curve (as the price of x changes) is vertical. Consider the substitution, income and total effects of a decrease in the price of x. Create a chart that shows the direction of the income, substitution and total effects on goods x and y.

a. What can you say, if anything, about the relative magnitudes of the income and substitution effects of the price decrease on the consumption of good x? Explain.

b. Graphically decompose the total effect of the price decrease into the substitution and income effects on a well-annotated graph. Make sure you clearly label each of the 3 effects.

Reference no: EM132200810

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