February 18, 2003
Income and Substitution Effects
An increase in the interest rate for a borrower:
Showing that the income effect can even reverse the substitution effect:
The 12:30 diagram had all the endowment in the future.
The substitution effect is thought to be the most important for most issues in economics. How big would the income effect be for an agent making $100,000 if the price change in question is pizza going from $2.00 per slice to $1.50 per slice?