Problem 3 Consider an economy with two goods only. Use Slutsky decomposition for good 2 (Ar₂ = Ar + Ax₂) to prove the following: (a) If the price of good 1 decreases and good 2 is inferior, then good 2 is a gross substitute for good 1. (b) If the price of good 1 decreases and good 2 is normal, then under what condition is good 2 still a gross substitute for good 1? Under what condition is good 2 a gross complement for good 1?

Problem 3 Consider an economy with two goods only. Use Slutsky decomposition for good 2 (Ar₂ = Ar + Ax₂) to prove the following: (a) If the price of good 1 decreases and good 2 is inferior, then good 2 is a gross substitute for good 1. (b) If the price of good 1 decreases and good 2 is normal, then under what condition is good 2 still a gross substitute for good 1? Under what condition is good 2 a gross complement for good 1?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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