question archive The income effect has a negative sign at the beginning of the equation
The income effect has a negative sign at the beginning of the equation
Subject:FinancePrice: Bought3
The income effect has a negative sign at the beginning of the equation. The reason for this sign is:A: An increase in price makes X more expensive so you need to consume less of X.B: A higher price increases your purchasing power, so the negative sign is to cancel the sign in the derivative of the demand with respect to income.C: It doesn’t matter because we always take the absolute value of the effect.D: The sign represents the fact that at higher prices you cannot afford the original bundle, so if X is normal (positive derivative) the direction should be negative.
