Question

7. Mustapha uses Laptop and the Software together. If the price of Laptop increases, what part of the change in demand is due to the substitution effect, and what part is due to the income effect? Explain.:

Answer 1

As the price of goods increases the quantity demanded of the goods is falling. The part of the decreases where the real income of the consumer is held constant is due to substitutions effect and the other half is due to the income effect this can be depicted in the diagrams as :

Since laptops and software are consumed together they are complementary goods. There is no substitutions effect in this case and fall in quantity demanded of the laptop from L1 to L2 is due to income effect only and substitution effect is zero in this case.

Software IE2 0 L2 Li C Laptop B X