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ECON100A_8 - Review 1 Substitutes E x1 p2 > 0 E x2 p1 > 0...

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 1/4/2008 1 Review
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 1/4/2008 2 Substitutes p 1 X 1 X 2 I/p 1 I/p 2 In other words, p 1 ↑→x 2 p 2 ↑→x 1 Tend not to combine these goods Note: Do not confuse with “perfect” substitutes 0 , 0 1 2 2 1 , , p x p x E E p 1 ↑→x 2
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 1/4/2008 3 Complements p 1 X 1 X 2 I/p 1 I/p 2 In other words, p 1 ↑→x 2 p 2 ↑→x 1 Tend to use these goods together Note: Do not confuse with “perfect” complements 0 , 0 1 2 2 1 , , < < p x p x E E p 1 ↑→x 2
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 1/4/2008 4 Compensated price change – Analysis  Say p 1 (Beer) Must end up on new (red budget line). : But imagine H.H., esq., is compensated enough to make him as happy as before Mom finds the cheapest way to do this. New optimum (X 1 ’*, X 2 ’*) We call this H.H.’s response to a compensated price change Note: If HH had returned to original choices, it would have been more costly to get same level of utility (blue line).
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