Suppose $U = \min ( X , Y )$ and the price of X is 1,the price of Y is 1 and income is $12.If the price of X increases to 2,the income effect (in terms of units of X bought)is
A)2
B)-1
C)0
D)-2

Question

Quizplus · Accepted Answer

When the price of X increases to 2, the consumer can afford fewer units of X with the same income of $12. Since $U = \min(X, Y)$, the consumer will adjust purchases to maintain equality between X and Y for utility maximization. Initially, with prices equal and an income of $12, the consumer could buy 6 units of each (spending $6 on X and $6 on Y). After the price increase, to maximize utility, the consumer would buy 4 units of each (spending $8 on X and $4 on Y), thus the income effect in terms of units of X bought is -2 (from 6 units to 4 units).

Suppose U=min⁡(X,Y)U = \min ( X , Y )U=min(X,Y) And the Price of X Is 1,the Price of Y

Suppose $U = \min ( X , Y )$ And the Price of X Is 1,the Price of Y