Income Substitution Effects

Document Sample
Income Substitution Effects Powered By Docstoc
					         Chapter 5

Income & Substitution Effects

           Session 4
General goal
To be familiar with Mathematical view
of response to price changes

Detailed goal
1.   Shephard lemma
2.   Roy’s identity
3.   The Substitution and income effects
4.   The slutsky equation
I. Shephard lemma & Roy’s identity
 a)   Expenditure function (Review)
 b)   The envelope theorem
 c)   Shephard lemma
 d)   Roy’s identity
 e)   Graph (Figure 5.11)
 f)   Example
II. Derivation of the Slutsky equation

a) Introduction
b) Using indirect approach to derive Slutsky
   Step 1
   Step 2
   Step 3
  II. Derivation of the Slutsky equation
c) Economic interpretation of Slutsky equation
   1. Substitution effect
   2. Income effect
   3. Total effect
d) Example 5.4
1. Problem 5.6 to 5.8 : Nicholson
( Figure 5.11) Return Explanation