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    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 ?
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    (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)
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    (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
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    (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)
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    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.
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    (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 ?
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    But there is no increase in real income because of the increase in the price of x
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    (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 ?
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    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.
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    (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) ?
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    Because Y was relatively more expensive before the price rise in x.
 
 
 
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