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The Income Effect - Assignment Example

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This assignment "The Income Effect" distinguishes between income and substitution effects for an inferior good and a normal good, discusses whether vouchers are better than cash for essential items for the less well off and explains the model of price discrimination. …
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The Income Effect
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Extract of sample "The Income Effect"

Download file to see previous pages Particularly the changes in the relative price of a good have both income and substitution effects. Either the income or substitution effect is dominant depends on the magnitude of the price change and on the nature of the good.
For example: In the case of normal or superior goods, the ‘income effect’ remains positive and more than the substitution effect; whereas in the case of an inferior good, the ‘substitution effect’ remains positive and more than the income effect. (See Figure I – IV below)
Even though there is a minimal cost attached to the use of vouchers, the less well off could still benefit from using it instead of cash. First, the business could trace back all their accumulated expenses over time. By having accurate documentation on the business’ cash out, the accountant could easily monitor its monthly budget.
Price discrimination normally exists when a company has the ability to price above the marginal cost; when the company can prevent or limit arbitrage; or when the consumers’ demand on goods and services differ from each other.
For example Company A and B sell a homogenous product in the market. Since company A is able to capture the interest of its target consumers more than company B, company A is able to sell its product line at a much higher price than company B.
The long-run marginal costs and average costs of a company that is a natural monopoly would generally decline when its production increases. In this case, the company is able to dominate the entire production for the market. Therefore, the long-run marginal cost curve of a natural monopoly will continue to fall even though the company is experiencing increasing returns to scale. (See Figure V below) ...Download file to see next pagesRead More
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