Joe's utility function is given by U(x,y)= min[x,y]. The price of x is $4 and the price of y is $2 and Joe's income is $12. If the price of x decreases to $2 but Joe's income stays constant, then:
A)the substitution effect is equal to 3.
B)the substitution effect is equal to 2.
C)the substitution effect is zero.
D)the substitution effect is equal to 1.

Question

Quizplus · Accepted Answer

Joe's utility function U(x,y) = min[x,y] indicates perfect complements, meaning he consumes x and y in equal quantities. When the price of x decreases, Joe will still consume x and y in equal amounts, so there is no substitution effect.

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