Question

How does a change in price or a change in income affect the optimal consumption bundle? For example, if the substitution effect outweighs the income effect, how does the optimal consumption bundle change?

Answer 1

Answer

we can see the affect of change in price or income on optimum consumption of bundle.If the consumer increases ( observed by parallel outward shift in budget constraint - and the slope will remain same relative because relative price have not been changed ) .The increase in the income result in increasing the size of the budget which will lead to large number of bundle consumption by the consumer. It will utimately increase the size of the budget and the consumer canbe better off. Also if the income increases , the consumer will consumer can buy one good more and less of other bundles. So here one of the good is normal and the other one is can say inferior type of a godd.So atleast one type of a good is normal good.in the consumption bundle.Also if we assume that all goods are inferior type.then if the change in income or say increase will result to consumer optimum bundle consumption inside the budget set.when the price of a good chnanges , the good can have two sort of effects on the behavior of consumer that is Substitution effect in which the consumer replace to a cheaper good say x for example. and avoid good - say which is expensive relatively .Due to this substitutional effect , consumer will purchase good -x more than good y ,The purchasing power increases as the price of good fall or less

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