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Questions › JNU › JNU SSS 2017 › Q40
2 marks, −0.5Microeconomics › Demand theory and elasticity › Income and substitution effects: the Slutsky equationHardabout 3 min

JNU SSS 2017 Question 40: Demand theory and elasticity

A consumer's preference over commodities 1 and 2 can be represented by the utility function U(x1,x2)=x1+x2U(x_1, x_2) = x_1 + x_2U(x1​,x2​)=x1​+x2​. Suppose the price of commodity 1 changes. Which of the following statements is certainly correct?

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Plain-text version

A consumer's preference over commodities 1 and 2 can be represented by the utility function U(x₁, x₂) = x₁ + x₂. Suppose the price of commodity 1 changes. Which of the following statements is certainly correct? (A) There is no income effect on the demand for commodity 1. (B) There is no substitution effect on the demand for commodity 1. (C) There is no substitution effect on the demand for commodity 1 if the cheaper good remains cheaper after the price change. (D) There is no income effect on the demand for commodity 1 if the cheaper good remains cheaper after the price change.

Also written as: A consumer's preference over commodities 1 and 2 can be represented by the utility function U(x_1, x_2) = x_1 + x_2. Suppose the price of commodity 1 changes. Which of the following statements is certainly correct?

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.

TestStop has 29 past-paper questions on this subtopic.

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