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Microeconomics

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Moderate

Income and Substitution Effects: Wherefore Demand?

MICRO-IRZIUA

A compensated demand curve is a demand curve adjusted to show how consumption varies with price assuming that the consumer is given money, or money is taken away, such that the utility under the new price equals the utility under the initial price.

Why might an economist be interested in deriving a compensated demand curve?

A

Because it isolates the income effect of price changes.

B

Because it isolates the substitution effect of price changes.

C

Because it shows the welfare effects of price changes.

D

Because it shows the proper mix of both the income and substitution effects.