The Slutsky equation portrays
A) only the substitution effect
B) only the income effect
C) both the income and substitution effects

Question

Quizplus · Accepted Answer

The Slutsky equation takes into account both the income and substitution effects. It decomposes the total effect of a price change into the substitution effect (as seen in the Hicksian demand curve) and the income effect (as seen in the change in purchasing power due to the change in price). Therefore, it is not just limited to one effect.

The Slutsky Equation Portrays