Question

Draw a diagram and use it to explain how to calculate income and substitution ratios. Make your diagram large and label all curves, axes, and points.

Answer 1

"At the point when a cost of good times falls a customer purchases a greater amount of x, no thus impact can be attributed to substitution and in addition salary impact the substitution impact is the adjustment in utilization designs because of an adjustment in the general costs of products goods the income effect is the change in consumption patterns due to the changes in purchasing power this can occur from income increases, price changes, or even currency fluctuations In the below diagram, the change of relative prices is the substitutions effect (x to x') (steep line to dotted line) and the change of purchasing power is the income effect (x' to x"") (dotted line to parallel solid line) when price of good times falls the optimal consumption level (or the quantity demanded) of good times increases this results in increases in quantity demanded of x due to substitution and income effect "