Income And Substitution Effect Perfect Substitutes

The price effect income effect and substitution effect under qlp have been explained in fig.

Income and substitution effect perfect substitutes. Suppose the price of good x falls ceteris paribus. Given the rather peicewise nature of the demands for each good in a utility function considering perfect substitutes i m not sure what the answer is. For example if the consumer increases its income and it s budget increases to 100 ceteris paribus she will keep spending all her budget in good x but her utility level will increase to 100. In this figure the consumer s initial budget line is l 1 m 1 and his initial equilibrium point is e 1 on ic 1.

Enjoy the videos and music you love upload original content and share it all with friends family and the world on youtube. I was recently asked about what the income and substitution effects are for perfect substitutes are. The income effect expresses the impact of higher purchasing power on consumption.