Economics
Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
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Chapter 19.A, Problem 2P
To determine

Concept Introduction:

Budget Line: This is defined as the combination of all the goods that a consumer can buy exhausting his whole income. The formula to calculate the budget line is:

    Economics, Chapter 19.A, Problem 2P , additional homework tip  1

Where,

  • Economics, Chapter 19.A, Problem 2P , additional homework tip  2is the quantity of good X.
  • Economics, Chapter 19.A, Problem 2P , additional homework tip  3is the quantity of good Y.
  • Economics, Chapter 19.A, Problem 2P , additional homework tip  4is the total income.
  • Economics, Chapter 19.A, Problem 2P , additional homework tip  5is the price of good X.
  • Economics, Chapter 19.A, Problem 2P , additional homework tip  6is the price of good Y.

Indifference Curve: The graph that shows the goods that provide the same satisfaction level is known as an indifference curve. They are a downward sloping curve and convex to the origin. Two indifference curve lines never intersect each other.

Substitution effects: It states that the demand of a good increases if the price of a substitute good increases and vice versa. Take an example of tea and coffee, tea and coffee are substitute goods. Hence, if the price of tea increases, then the demand for coffee increases.

Income effects: It states that the demand for normal goods and the income are directly related which means that when income increases, then the demand for normal goods also increases and vice versa.

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