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Draw a diagram to illustrate the Slutsky decomposition for the case of an increase in p1. with money income m and p2 fixed. x1, x2
Draw a diagram to illustrate the Slutsky decomposition for the case of an increase in p1. with money income m and p2 fixed.
x1, x2 are both ordinary goods; x1 is inferior and x2 is normal.
In the diagram, clearly indicate:
- the rotation/shifts of the budget line
- the optimal bundle before the price change (Point A)
- The optimal bundle after accounting for only the substitution effect (Point B)
- The optimal bundle after accounting for also the income effect (Point C)
- The relevant indifference curves.
*can use sample numbers for prices and income and quantity consumed to draw the graph*
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