Andrew's utility function is U(x₁,x₂)=xx₂. Every week he has 5 units of good 1 and 15 units of good 2 as endowment, and he can buy or sell good 1 at the price p₁ = 1 and good 2 at the price of p, 1 in the market. He does not have any other income source. Andrew regularly brings his endowment to market and trades to his optimal consumption bundle. One week, Andrew brought his usual endowment to market only to learn that the price of good I had increased to p₁ = 5, while the price of good 2 remained at p₂ = 1. Page 8 24. Which of the following statements is correct about the substitution effect due to this price change? A) The substitution effect decreases the demand for good 1 by 1 unit. B) The substitution effect decreases the demand for good 1 by 3 units. C) The substitution effect decreases the demand for good 1 by 6 units. D) The substitution effect increases the demand for good 2 by 10 units. E) The substitution effect increases the demand for good 2 by 20 units.

Andrew's utility function is U(x₁,x₂)=xx₂. Every week he has 5 units of good 1 and 15 units of good 2 as endowment, and he can buy or sell good 1 at the price p₁ = 1 and good 2 at the price of p, 1 in the market. He does not have any other income source. Andrew regularly brings his endowment to market and trades to his optimal consumption bundle. One week, Andrew brought his usual endowment to market only to learn that the price of good I had increased to p₁ = 5, while the price of good 2 remained at p₂ = 1. Page 8 24. Which of the following statements is correct about the substitution effect due to this price change? A) The substitution effect decreases the demand for good 1 by 1 unit. B) The substitution effect decreases the demand for good 1 by 3 units. C) The substitution effect decreases the demand for good 1 by 6 units. D) The substitution effect increases the demand for good 2 by 10 units. E) The substitution effect increases the demand for good 2 by 20 units.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.15P

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