Question

suppose a consumer has preferences between two goods that are perfect substitutes. can you change prices in such a way that the entire demand response is due to the income effect?

Answer 1

Yes you can change prices in such a way that the entire demand response is due to the income effect.

What is Income effect?

Usually, when we talk about perfect alternatives, we are talking about lowering the cost of the expensive good. If you were on the y axis of the performance subs graph, the price of good x, which was previously quite expensive, has now decreased. Therefore, your decision will be limited to the x axis.

The term "income effect" describes the shift in real income or purchasing power brought on by a price adjustment. Therefore, as prices drop, your real income essentially rises.

If we lower the cost of the already affordable good. The consumer's real income then rises. As a result, he purchases the cheap item.

Therefore, this shift in demand, where he now purchases more of the cheap commodity, has been brought about by an increase in real income due to a decrease in the price of the previously cheap good.

So, The answer is Yes.

To know more abou Income Effect:

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