income and substitution effect

[Alex T Tabarrok]

Almost every intermediate micro text spends a great deal of time on income versus substitution effects. This is a somewhat tricky concept for students to understand so one would hope that the payoff to learning the idea is high. But what is the payoff? One of the few applications is to labor supply which most textbooks put much later in the text and don't connect to the income and substitution effect anyway. Most textbooks don't do any sophisticated welfare analysis either. So is it really worthwhile to learn this material?

Alex

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Alexander Tabarrok Department of Economics, MSN 1D3 George Mason University Fairfax, VA, 22030 Tel. 703-993-2314

Web Page: http://mason.gmu.edu/~atabarro/
and
Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621 Tel. 510-632-1366