Consider a consumer with a utility function U = x1 + x2. Initially, the consumer was only purchasing good 2, but after the price of good 1 was reduced, the consumer switched all of her consumption into good 1. The total change in consumption of good 1 is due to the pure substitution effect (and the income effect is zero).Group of answer choicesTrueFalse
Question
Consider a consumer with a utility function U = x1 + x2. Initially, the consumer was only purchasing good 2, but after the price of good 1 was reduced, the consumer switched all of her consumption into good 1. The total change in consumption of good 1 is due to the pure substitution effect (and the income effect is zero).Group of answer choicesTrueFalse
Solution
The statement is True.
Here's why:
-
The utility function U = x1 + x2 suggests that the consumer derives equal satisfaction from consuming both goods. In other words, the consumer is indifferent between consuming good 1 and good 2.
-
Initially, the consumer was only purchasing good 2. This could be because good 2 was cheaper or more readily available.
-
However, when the price of good 1 was reduced, the consumer switched all of her consumption into good 1. This is consistent with the substitution effect, which refers to the change in consumption resulting from a change in the relative prices of goods.
-
In this case, the consumer substituted good
Similar Questions
Consider a consumer buying perfect complements. If there is a decrease in the price of good 1, the total change in consumption of good 1 is due toGroup of answer choicesthe pure substitution effectthe income effectthe pure substitution effect minus the income effectit depends on whether the good is inferior or normalnone of the above
When the price of a normal good increases,Group of answer choicesboth the income and substitution effects encourage the consumer to purchase more of the good.both the income and substitution effects encourage the consumer to purchase less of the good.the income effect encourages the consumer to purchase less of the good, and the substitution effect encourages the consumer to purchase more of the good.the income effect encourages the consumer to purchase more of the good, and the substitution effect encourages the consumer to purchase less of the good.
What is the term for the change in total consumption resulting from a price change for a good, causing a consumer to buy more of this good rather than other goods? Income effect Substitution effect Price effect Commodity effect
Multiple Select QuestionSelect all that applyThe income effect:Multiple select question.only works in conjunction with the law of diminishing marginal utility.works in the same direction as the substitution effect for normal goods. refers to the change in the demand for a good caused by a change in a consumer's purchasing power.is the same as the substitution effect.works in the same direction as the substitution effect for inferior goods.
Which statement best describes the income effect?It is the change in consumption due to a change in purchasing power resulting from a price changeIt is the change in consumption that results from a change in the consumer's incomeIt is the change in consumption that results from a change in the price of a substitute goodIt is the change in consumption that results from a change in the price of a complementary good
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.