Answer to Question #82226 in Microeconomics for Saurav Borah

Question

1. What is price effect. Prove that price effect is the summations of income effect and substitution effect with the help of I.C theory in inferior goods case.

Answer 1

The price effect is the impact that market face as a result of the customer's expenditure based on their income. Income effect and substitution effect lead to the increase in demand of quantity of products whose prizes have reduced. Thus, normal products purchased vary inversely with their prices as the case of the income effect is positive.