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A consumers consumes only two goods. If the price of one good falls the indifference curve: a) Shifts upwards b) shifts downwards c) can shift both upwards or downwards d) does not shift. Give reason for your answer.?
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A consumers consumes only two goods. If the price of one good falls th...
Introduction:
When the price of one good falls, it affects the consumer's consumption choices and preferences. To understand the impact of the price change on the consumer's indifference curve, we need to analyze the substitution and income effects.
Explanation:
1. Substitution Effect:
When the price of one good falls, it becomes relatively cheaper compared to the other good. As a result, the consumer will substitute the now cheaper good for the relatively more expensive one. This leads to a change in the consumer's consumption pattern, and the indifference curve will shift.
2. Income Effect:
The fall in the price of one good increases the consumer's purchasing power. As a result, the consumer's real income increases, allowing them to afford more of both goods. This leads to an increase in the consumer's overall satisfaction, and the indifference curve will shift.
Impact on the Indifference Curve:
Based on the substitution and income effects, we can conclude that the indifference curve can shift in both directions, upwards or downwards, depending on the relative magnitude of these effects.
1. If the substitution effect dominates:
If the consumer is highly responsive to price changes and the substitution effect outweighs the income effect, the indifference curve will shift upwards. This indicates that the consumer is willing to consume more of both goods as the price of one good falls.
2. If the income effect dominates:
If the consumer is relatively less responsive to price changes and the income effect outweighs the substitution effect, the indifference curve will shift downwards. This implies that the consumer is willing to consume less of both goods as the price of one good falls, as they are now able to afford more of the other good.
Conclusion:
In summary, when the price of one good falls, the indifference curve can shift both upwards or downwards, depending on the relative strength of the substitution and income effects. The direction of the shift indicates the consumer's preference changes and their willingness to consume more or less of both goods.
When the price of one good falls, it affects the consumer's consumption choices and preferences. To understand the impact of the price change on the consumer's indifference curve, we need to analyze the substitution and income effects.
Explanation:
1. Substitution Effect:
When the price of one good falls, it becomes relatively cheaper compared to the other good. As a result, the consumer will substitute the now cheaper good for the relatively more expensive one. This leads to a change in the consumer's consumption pattern, and the indifference curve will shift.
2. Income Effect:
The fall in the price of one good increases the consumer's purchasing power. As a result, the consumer's real income increases, allowing them to afford more of both goods. This leads to an increase in the consumer's overall satisfaction, and the indifference curve will shift.
Impact on the Indifference Curve:
Based on the substitution and income effects, we can conclude that the indifference curve can shift in both directions, upwards or downwards, depending on the relative magnitude of these effects.
1. If the substitution effect dominates:
If the consumer is highly responsive to price changes and the substitution effect outweighs the income effect, the indifference curve will shift upwards. This indicates that the consumer is willing to consume more of both goods as the price of one good falls.
2. If the income effect dominates:
If the consumer is relatively less responsive to price changes and the income effect outweighs the substitution effect, the indifference curve will shift downwards. This implies that the consumer is willing to consume less of both goods as the price of one good falls, as they are now able to afford more of the other good.
Conclusion:
In summary, when the price of one good falls, the indifference curve can shift both upwards or downwards, depending on the relative strength of the substitution and income effects. The direction of the shift indicates the consumer's preference changes and their willingness to consume more or less of both goods.
Community Answer
A consumers consumes only two goods. If the price of one good falls th...
Option (d) is right
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A consumers consumes only two goods. If the price of one good falls the indifference curve: a) Shifts upwards b) shifts downwards c) can shift both upwards or downwards d) does not shift. Give reason for your answer.?
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A consumers consumes only two goods. If the price of one good falls the indifference curve: a) Shifts upwards b) shifts downwards c) can shift both upwards or downwards d) does not shift. Give reason for your answer.? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about A consumers consumes only two goods. If the price of one good falls the indifference curve: a) Shifts upwards b) shifts downwards c) can shift both upwards or downwards d) does not shift. Give reason for your answer.? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A consumers consumes only two goods. If the price of one good falls the indifference curve: a) Shifts upwards b) shifts downwards c) can shift both upwards or downwards d) does not shift. Give reason for your answer.?.
A consumers consumes only two goods. If the price of one good falls the indifference curve: a) Shifts upwards b) shifts downwards c) can shift both upwards or downwards d) does not shift. Give reason for your answer.? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about A consumers consumes only two goods. If the price of one good falls the indifference curve: a) Shifts upwards b) shifts downwards c) can shift both upwards or downwards d) does not shift. Give reason for your answer.? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A consumers consumes only two goods. If the price of one good falls the indifference curve: a) Shifts upwards b) shifts downwards c) can shift both upwards or downwards d) does not shift. Give reason for your answer.?.
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