Income and Substitution Effects of a Price Change Essay

Income and Substitution set up of a Price Change - Essay ExampleComplete, reflexive and transitive ar the axioms of consumer theory. The theory of consumer preferences quite a little be formulated on the basis of the above axioms (Samuelson, 1956. p.3).The two axes represent a typical white plague of a consumer of goods 1 and 2. A consumption bundle (x1,x2) is taken along with the other consumption bundles that ar preferred weakly to the selected bundle. This is what we mean by a set that is weakly preferred. The nonchalance curve is organize by the bundles forming the boundary of the selected set i.e. the bundles that impart provide the consumer as much satisfaction as the selected bundle. The indifference curve can be drawn through any consumption bundle. One of the disadvantages in victimization indifference curve analysis is that it shows only the consumption bundle perceived by the consumer is indifferent. It fails to capture the bundles which are better or worse. One o f its characteristics is indifference curve that represents distinct preferential levels cannot cross. The rate at which the consumer likes to depute goods is called the marginal rate of substitution. MRS is derived from the slope of the indifference curveThe budget constraint of the consumer is p1x1+p2x2=m. The consumption of good 1 is taxed at a rate of t. The new budget constraint will be (p1+t)x1+p2x2=m. The effect of the swap in price on the demand conditions is shown in the figure below.The set of bundles that are preferred by a consumer to the optimal choice is above the indifference curve and the set of bundles that is against the affordability is above the indifference curve. therefrom the optimal choice is the best bundle that can be chosen by the consumer. Now, an income tax is taken into consideration which raises the revenue by the same amount as the tax. The form of that budget constraint will be p1x1+p2x2=m-tx1*, where tx1* is the rise in revenue because of tax.