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# Please explain the income effect in economics to me ? Watch

1. In a world of two goods (say, x and y) an increase in the price of x which is accompanied by money compensation for the income effect alone will lead to

a) A fall in quantity demanded of x and a fall in well-being;

(b) A fall in the quantity demanded of x and no change in well-being;

(c) No change in quantity demanded of x and no change in well-being;

(d) No change in quantity demand for x and a fall in well-being.

?

From what I remember, if the price of something increases, you consume more of the good that is now relatively cheaper and your overall utility does not change (substitution effect?)

So the answer would be b ?

However I also remember income effect, which means you go to a new higher budget line and actually have better overall utility but that doesnt seem to be an option ?
2. (Original post by jon2016)
In a world of two goods (say, x and y) an increase in the price of x which is accompanied by money compensation for the income effect alone will lead to

a) A fall in quantity demanded of x and a fall in well-being;

(b) A fall in the quantity demanded of x and no change in well-being;

(c) No change in quantity demanded of x and no change in well-being;

(d) No change in quantity demand for x and a fall in well-being.

?

From what I remember, if the price of something increases, you consume more of the good that is now relatively cheaper and your overall utility does not change (substitution effect?)

So the answer would be b ?

However I also remember income effect, which means you go to a new higher budget line and actually have better overall utility but that doesnt seem to be an option ?
I haven't done this stuff in ages but I think it would be b right? I dunno if x and y are perfect substitutes but if they are then there would be no loss in utility because you would just by more of good y instead of x (and so x's quantity demanded would decrease)
3. (Original post by OrionMusicNet)
I haven't done this stuff in ages but I think it would be b right? I dunno if x and y are perfect substitutes but if they are then there would be no loss in utility because you would just by more of good y instead of x (and so x's quantity demanded would decrease)
Maybe I am over complicating it but I was thinking about it in terms of https://en.wikipedia.org/wiki/Substitution_effect
and trying to identify income and sub effect
4. (Original post by OrionMusicNet)
I haven't done this stuff in ages but I think it would be b right? I dunno if x and y are perfect substitutes but if they are then there would be no loss in utility because you would just by more of good y instead of x (and so x's quantity demanded would decrease)
maybe I am over complicating it, but I was thinking about it terms of income and sub effect

see wikipedia article substitution effect ( I cant post the link)
5. I agree with option b because the additional income would compensate you for the price rise in x so protecting your well being but you would also substitute some of x with more y as it is now relatively cheaper.
6. (Original post by mapotts53)
I agree with option b because the additional income would compensate you for the price rise in x so protecting your well being but you would also substitute some of x with more y as it is now relatively cheaper.
Why doesnt overall utility go up ? you swap x for y, so no change in utility and you get more income so you can consume more x and y ?
7. But there is no increase in real income because of the increase in the price of x
8. (Original post by mapotts53)
But there is no increase in real income because of the increase in the price of x
Dont you save money by consuming more Y ?money you can use to move to a higher utility curve ?
9. You consume more y because it is relatively cheaper but had you preferred y you would have chosen it over x before. The extra units of y consumed bring you up to the same level of utility you had before.
10. (Original post by mapotts53)
You consume more y because it is relatively cheaper but had you preferred y you would have chosen it over x before. The extra units of y consumed bring you up to the same level of utility you had before.
why not consume the extra units of Y in the first place ?

Say you consume (5,5) before the prise rise, now you consume (7,3) ?
11. Because Y was relatively more expensive before the price rise in x.

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