Unformatted text preview: he total change in demand from part (b), 0.1 is the
income effect from part (a), and we multiply by 2 because before the price change the
consumer was buying 2 apples. In this case, however, the price increase is 0.1, so we
have to multiply both terms by 0.1. Therefore S = -0.3*.1+0.1*.1*2=-0.01. That is, the
substitution effect makes this person reduce his consumption of apples by .01 apples and
the income effect makes him reduce it by 0.02 apples.
d) The difference
between the two
substitution effects is that
the Slutsky substitution
effect holds purchasing
power constant. This
means that the consumer
is given enough money so
that she can still consume
her original bundle A.
The Hicks substitution
effect holds utility
constant. This means that
the result of the
substitution effect is
another point on her
initial indifference curve. 3. a) In the graph, E is the endowment point and A is the optimal consumption bundle. b) If the price of fish goes down, what is important for John’s welfare is if he is buying
extra fish beyond what he catches or if he...
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This note was uploaded on 02/09/2014 for the course ECON 1130 taught by Professor Baum-snow during the Spring '11 term at Brown.
- Spring '11