Question

Graphs showing substitution effect is greater than income effect

Answer 1

INCOME EFFECT Income effect defined as the change in consumer purchase of the goods as a result of change in money income. I commodity B AA ALI, A₂L2, A3 L3 - are budget line ICC (Income Consumption curve > Indentiby 0 0.,,0, → Consumer Consumer Consumption) IC→ Income curve SI C3 Liz L3 commodity A # When the budget of the consumer is Ali has equilibrium is at and as his uncome rises, the budget lime shift forward right and the equilibrium is at O2 and then Oz' # As the income rises, the consumption of - both the both - goods also thereases. SUBSTITUTION EFFECT Substitution effect defined as the quantity Bu the change in the quantity purchased of a good as a consequence of a change in its relative price alone, #When the relative price of the goods falls, quantity purchase increases er implies that consumer will be at the higher indifference curve due to increase in real income level of Salsbachim constant # Price change is compensated by simultaneous money theme.

Substitution effect is greater than income effect >IC Income curve Budget line # When from from the budget A to c is c to B is Leisure line Shift forward right the income effect and the substitution effect - # According to this graph When the substitution effect is greater than the income effect a higher earning will actually have the worker take less Leisure and thus more work. with a higher wage or earning the supply of lab of rises