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    Distinguish between the income and substitution effects in u

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    Distinguish between the income and substitution effects in utility theory. Can these effects be used to derive a demand curve?

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    Income effect occurs due to increase or decrease in real income resulting from a decrease or increase in the price of a commodity. Substitution effect occurs due to the consumer's inherent tendency to substitute cheaper goods for relatively expensive ones.

    The substitution effect always work in one direction, ie, if one of the two commodities becomes relatively cheaper, more of it and less of the other would be consumed. The income effect can work in both the directions.

    The substitution effect of a ...

    Solution Summary

    Income effect occurs due to increase or decrease in real income resulting from a decrease or increase in the price of a commodity.

    $2.19

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