Joe's utility function is given by U(x,y)= min[x,y] .If the price of x increases but Joe's income stays constant, then:
A)the total effect is zero.
B)the substitution effect exceeds the income effect.
C)the income effect is zero.
D)the substitution effect is zero.

Question

Quizplus · Accepted Answer

Since Joe's utility function is U(x,y)= min[x,y], we know that he consumes x and y in equal amounts in order to maximize his utility. Therefore, if the price of x increases, Joe will substitute away from x and towards y, keeping his overall consumption at the same level. This is the substitution effect. However, since Joe's income stays constant, he cannot increase his overall consumption, so there is no income effect. Therefore, the only effect is the substitution effect, and the correct answer is D) the substitution effect is zero.

Joe's Utility Function Is Given by U(x,y)= Min[x,y]