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Endowment effect
Suppose that our individual/consumer has initial endowment only of one good. Assuming the initial
“e”
endowment of good 1 is e and 0 initial endowment of good 2. The point of initial endowment
must represent a positive amount of good 1 and 0 of good 2. So, the point of initial endowment is on
the horizontal axis.
Suppose price of good 1 increase, the slope of the budget line increase. The slope increase in
absolute value and it still go through e. Now you can immediately see that our budget set has widen
or enlarge. The price of good 1 increase and your income increase so there are many more
alternatives consumption bundles that you may obtain. We might call this endowment effect.