The change in consumption from MS to MN is due purely to the income effect. Note that the compensated budget, CB is parallel to the blue budget she faces after the price increase but represents greater spending power or income.

   When our consumer finds herself with more spending power but facing the same prices she increases her consumption of movies (MS is greater thanMN). This means movies are a normal good for her.

Copyright © 1995-2004, Inc. - All Rights Reserved