![]() ![]() ![]() Suppose initially the consumer is in equilibrium at point R on the budget line PQ where the indifference curve I 1 is tangent to it at point R in Figure 12.19. Hicks has separated the substitution effect and the income effect from the price effect through compensating variation in income by changing the relative price of a good while keeping the real income of the consumer constant. ![]() There are two methods of separating these two effects from the price effect, the Hicksian method and the Slut-sky method which are explained below. The income effect is the increase in the quantity demanded of X when the real income of the consumer increases as a result of fall in the price of X while the price of Y is held constant. The consumer substitutes the cheaper good X for the relatively dearer good Y.
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