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7. A good's price change can be decomposed into two distinct effects: the income and substitution effect. The income effect measures the change in a
7. A good's price change can be decomposed into two distinct effects: the income and substitution effect. The income effect measures the change in a consumer's real purchasing power and the substitution effect measures the incentive to switch to relatively cheaper goods. Do these two effects always move in the same direction? How can decomposing a good's price change into the income effect and substitution effect help us explain the existence of Giffen goods
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