In a two-good world, a consumer's preferences over commodities 1 and 2 can be represented by the utility function , where . The consumer's income is known to be very high. Then, the demand for good 1 displays which of the following?
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In a two-good world, a consumer's preferences over commodities 1 and 2 can be represented by the utility function U(x₁, x₂) = v(x₁) + x₂, where x₁, x₂ ≥ 0. The consumer's income is known to be very high. Then, the demand for good 1 displays which of the following? (A) The substitution effect is negative and the income effect is positive (B) The substitution effect is positive and the income effect is negative (C) The substitution effect is zero and the income effect is positive (D) The substitution effect is negative and there are no income effects
Also written as: In a two-good world, a consumer's preferences over commodities 1 and 2 can be represented by the utility function U(x_1, x_2) = v(x_1) + x_2, where x_1, x_2 >= 0. The consumer's income is known to be very high. Then, the demand for good 1 displays which of the following?
Demand theory and elasticity has come up 161 times in 7 exams since 2004.
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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Question from the JNU SSS 2012 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.