Whar do the income effect, the substitution effect anddimishnging marginal utili

Question

Whar do the income effect, the substitution effect anddimishnging marginal utilityy have in connon> a. all are required to explain th eitility-maximizing poaitionof a consumer b. they are all empirically measurabke c.they all help explaining the upsloping supply curve d. they all help explain the down sloping demand curve Whar do the income effect, the substitution effect anddimishnging marginal utilityy have in connon> a. all are required to explain th eitility-maximizing poaitionof a consumer b. they are all empirically measurabke c.they all help explaining the upsloping supply curve d. they all help explain the down sloping demand curve

Explanation / Answer

                     Theincome effect is the impact of a change in price onconsumers’ real incomes and consequently on the quantity ofthat product demanded. An increase in price means that lessreal income is available to buy subsequent amounts of theproduct.

                     Thesubstitution effect is the impact of a change in aproduct’s price on its cost relative to other substituteproducts’ prices. A higher price for a particularproduct with no change in the prices of substitutes means that theitem has become relatively more expensive compared to itssubstitutes. Therefore, consumers will buy less of thisproduct and more of the substitutes, whose prices are relativelylower than before

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