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Substitution Effect
- The substitution effect is change in an item's consumption associated with the change in the price of the item, level of utility held constant.
- When the price of item declines, substitution effect leads to an increase in the quantity of item demanded.
Income Effect
- The income effect is change in the consumption of an item brought by increase in purchasing power, with the price of item held constant.
- When income of person increases, the quantity demanded for product can increase or decrease.
- Even with inferior goods, the income effect is sufficiently large to outweigh the substitution effect.
Normal profit: Normal profit is when total revenue is exactly equal to total cost when the latter includes both explicit costs. It is the type of profit when made by firms in
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Instructions to Students 1. Answer all the questions, using economic models where appropriate. Begin a question on a new page. 2. Please attach a copy of the assignment cove
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