Suppose a consumer's preferences over commodities 1 and 2 can be represented by the utility function , where . The prices of the two commodities are 1 and 2 respectively and the consumer's income is 150.
Suppose the price of commodity 2 reduces to 1 while the price of the other commodity and the consumer's income remain unchanged. The income effect according to Slutsky of this price change on the optimal amount of commodity 1 is
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Suppose a consumer's preferences over commodities 1 and 2 can be represented by the utility function U(x₁, x₂) = min {x₁, x₂}, where x₁, x₂ ≥ 0. The prices of the two commodities are 1 and 2 respectively and the consumer's income is 150. Suppose the price of commodity 2 reduces to 1 while the price of the other commodity and the consumer's income remain unchanged. The income effect according to Slutsky of this price change on the optimal amount of commodity 1 is (A) 0 (B) 25 (C) -25 (D) -1
Also written as: Suppose a consumer's preferences over commodities 1 and 2 can be represented by the utility function U(x_1, x_2) = min {x_1, x_2}, where x_1, x_2 >= 0. The prices of the two commodities are 1 and 2 respectively and the consumer's income is 150. Suppose the price of commodity 2 reduces to 1 while the price of the other commodity and the consumer's income remain unchanged. The income effect according to Slutsky of this price change on the optimal amount of commodity 1 is
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.