Question

To have no substitution​ bias, what shape would the demand curve need to be for the products in the market​ basket? To have no substitution​ bias, the demand curves for the products in the market basket would need to be _________.

Answer 1

Answer:

Vertical

Explanation:

To have no substitution​ bias, what shape would the demand curve need to be for the products in the market​ basket? To have no substitution​ bias, the demand curves for the products in the market basket would need to be vertical.

The substitution effect holds that as the price of one good falls, it becomes relatively less expensive. Therefore, assuming other alternative products stay at the same price, at lower prices the good appears cheaper, and consumers will switch from the expensive alternative to the relatively cheaper one. HENCE IN ACCORDANCE TO THE LAW OF DEMAND, THE DEMAND CURVE WILL BE DOWNWARD SLOPING AS DEMAND FALLS FOR THE GOOD WITH INCREASE IN ITS PRICE.

However, if there is no substitution bias, if we ignore the substitution effect; it will mean that the quantity demanded will not change and customers will not switch to cheaper goods, when the price a good increases.

HENCE, WITH CONSTANT DEMAND AS PRICE INCREASES, THE DEMAND CURVE WILL BE VERTICAL