The Method for Finding the Substitution Effect of a Price

question 88

Multiple Choice

The method for finding the substitution effect of a price change on consumption of good x is to:

• A)Find the initial optimal consumption basket before the price change and then find the decomposition basket and measure the change in consumption of the good between the two baskets.
• B)Find the initial optimal consumption basket before the price change, then find the final optimal consumption basket after the price change and measure the change in consumption of the good between the two baskets.
• C)Find the final optimal consumption basket after the price change and then find the decomposition basket and measure the change in consumption of the good between the two baskets.
• D)Find the initial and final optimal consumption baskets, before and after the price change, find the decomposition basket, and add up the total changes between the two optimal baskets and the decomposition basket.

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Definitions:

Useful Life

The estimated duration of time over which an asset is expected to be functional and generate revenue for its owner.

Annual Expected Income

An estimate of the amount of money that is anticipated to be earned over a one-year period from various sources of income.

Salvage Value

An asset's forecasted value after its period of usability has concluded.

Cost

The amount of money or resources expended to obtain an asset, service, or achieve a specific outcome.