1. The North has a budget of 1000 Silver Stags to allocate to its war effort. It
ID: 1142099 • Letter: 1
Question
1. The North has a budget of 1000 Silver Stags to allocate to its war effort. It is to be spent on Valyrian steel and dragon glass. A ton of Valyrian steel costs 250 Silver Stags, the same price as a crate of dragon glass Just in time, a new supply of Valyrian steel is discovered at the bottom of the Sea of Sighs, cutting its price almost by half. The two budget lines are already drawn in the graph below, along with The North's preferences. Please graphically decompose the effect of the price cut on the demand for steel into substitution and income effect.Explanation / Answer
In economics and particularly in consumer choice theory, the substitution effect is one component of the effect of a change in the price of a goodupon the amount of that good demanded by a consumer, the other being the income effect.
The income effect results in consumers spending more or less in general and does not necessarily indicate buying items of higher or lower value. A consumer may opt to purchase more expensive goods in lesser quantities or cheaper goods in higher quantities. A concept called marginal propensity to consume explains how consumers spend based on income. It is based on the balance between the spending versus saving habits of the consumer. Marginal propensity to consume is included in a larger theory of macroeconomics known as Keynesian economics. The theory draws comparisons between production, individual income and the tendency to spend more of it.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.