Explain What Would Happen to the Equilibrium Consumption of Two

question 43

Essay

Explain what would happen to the equilibrium consumption of two goods,X and Y,if (a)income doubled and all prices tripled,(b)all prices doubled and income tripled,and (c)all prices and income doubled.In each case,show the effects when both goods are normal goods and when one good is a normal good and the other an inferior good.

Understand the concept of price elasticity of demand.

Learn how the availability of substitutes affects price elasticity.

Recognize the impact of time on the price elasticity of demand for goods.

Distinguish between goods that are necessities and luxuries in terms of their price elasticity.

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Definitions:

Utility Function

A concept in economics that defines how individuals or entities decide among various alternatives based on the perceived happiness or satisfaction each option will provide.

Income

The amount of money received on a regular basis from work, property, business, investment, or welfare payments.

Price

The amount of money required to purchase a good or service, determined by various factors including supply, demand, cost of production, and market conditions.

Utility Function

A representation in economic theory of how a consumer ranks different bundles of goods based on the level of satisfaction (utility) they provide.