In intermediate economics we are told that Total Effect = Income effect + Substitution effect but in advance level this relation is changed to
Total effect+income effect = substitution effect
why is that? please explain with logic
2007-04-05 09:03:51 · 2 answers · asked by soe s 1 in Social Science ➔ Economics
It makes no sense. Are you sure there is not a sign error . I think it should be Total effect - income effect = substitution effect
2007-04-05 12:55:15 · answer #1 · answered by meg 7 · 0⤊ 1⤋
The reason that this is tricky, is because the income effect is quantum when it comes to disposable income.
If you make $10 a day you may buy 1 bottle of wine. If you make $15 per day, you may buy 10 bottles of wine.
If you make $9 per day, you may buy one bottle of grape juice.
Just think about yourself and how you spend when you have "too much money" or "too little money"
2007-04-05 18:00:55 · answer #2 · answered by Santa Barbara 7 · 0⤊ 1⤋