Neville, in Problem 2, has a friend named Colin. Colin has the same demand function for claret as Neville, namely q = .02m - 2p, where m is income and p is price. Colin's income is $7,500 and he initially had to pay a price of $40 per bottle of claret. The price of claret rose to $80. The substitution effect of the price change

Question

Quizplus · Accepted Answer

The substitution effect is calculated by keeping utility constant and only considering the change in quantity demanded due to the change in price. Initially, Colin's demand is q = 0.02(7500) - 2(40) = 70. When the price increases to $80, the substitution effect can be isolated by considering the change in price alone, which reduces demand by 24 units.

Neville, in Problem 2, Has a Friend Named Colin