D9) Given current prices, Johnson spends all his free time on pursuing gold (x1) from Danny, which costs (p1) hours of service per coin. His Marshallian demand function can be represented by x1(p1,I) = I/p1 and his Hicksian demand can be represented by xh1(p1,u) = u/5 . (a) Verify that the Slutsky Equation holds for x1 when there is a change in p1. (b) What is the substitution effect of x1 when there is a change in p1? (c) What is the income effect of x1 when there is a change in p1?
D9) Given current prices, Johnson spends all his free time on pursuing gold (x1) from Danny, which costs (p1) hours of service per coin. His Marshallian demand function can be represented by x1(p1,I) = I/p1 and his Hicksian demand can be represented by xh1(p1,u) = u/5 . (a) Verify that the Slutsky Equation holds for x1 when there is a change in p1. (b) What is the substitution effect of x1 when there is a change in p1? (c) What is the income effect of x1 when there is a change in p1?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
D9)
Given current prices, Johnson spends all his free time on pursuing gold (x1) from Danny,
which costs (p1) hours of service per coin. His Marshallian demand function can be represented
by
x1(p1,I) = I/p1
and his Hicksian demand can be represented by
xh1(p1,u) = u/5 .
(a) Verify that the Slutsky Equation holds for x1 when there is a change in p1.
(b) What is the substitution effect of x1 when there is a change in p1?
(c) What is the income effect of x1 when there is a change in p1?
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