Asked by
chaoyu Liang
on Oct 14, 2024
Verified
Charlie's utility function is xAxB.The price of apples used to be $1, the price of bananas used to be $2, and his income used to be $40.If the price of apples increased to $5 and the price of bananas stayed constant, the substitution effect on Charlie's apple consumption would reduce his consumption by
A) 4 apples.
B) 13 apples.
C) 8 apples.
D) 16 apples.
E) None of the above.
Utility Function
Describes how different combinations of goods or services (or different outcomes) provide levels of satisfaction or utility to an individual.
Substitution Effect
The change in consumption patterns due to changes in the relative prices of goods, leading consumers to substitute more expensive items with cheaper alternatives.
- Investigate the influence of price variations on the demand from consumers through income and substitution effects.
- Identify how variations in prices and income influence the selection of consumption bundles in relation to various preference categories (strictly convex, perfect substitutes, and perfect complements).
Verified Answer
JL
Learning Objectives
- Investigate the influence of price variations on the demand from consumers through income and substitution effects.
- Identify how variations in prices and income influence the selection of consumption bundles in relation to various preference categories (strictly convex, perfect substitutes, and perfect complements).