For the consumer with , income Rs. , bread price Rs. , water price rising from Re. to Rs. on removal of the subsidy: the income effect of the removal of the water subsidy is
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2 marks, −1MicroeconomicsDemand theory and elasticityIncome and substitution effects: the Slutsky equationHardabout 4 min
DSE 2004 Question 15: Demand theory and elasticity
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For the consumer with u=xy, income Rs. 10, bread price Rs. 3, water price rising from Re. 1 to Rs. 2 on removal of the subsidy: the income effect of the removal of the water subsidy is (A) ((10+√200)/4, (10+√200)/6) (B) ((10-√200)/4, (10-√200)/6) (C) (-1/2,-1/3) (D) ((5-√200)/4, (15-√200)/6)
Demand theory and elasticity has come up 161 times in 7 exams since 2004.
What this question tests
This question is on Income and substitution effects: the Slutsky equation, part of Demand theory and elasticity in Microeconomics.
Splitting a price change into a substitution effect and an income effect, and why Giffen goods break the law of demand.
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