Ben consumes two goods and his utility function is U(x₁, x₂)=x²₁x⁴₂.The price of good 2 does not change and his income does not change, but the price of good 1 decreases. A)The income effect is zero, since his income remained constant. B)The substitution effect on the demand for good 2 is zero, since the price of good 2 did not change. C)The substitution effect reduces the demand for good 2, and since the income effect is zero, the demand for good 2 falls. D)The substitution effect of the price change reduces the demand for good 2 and increases the demand for good 1. E)More than one of the above statements is true.

Question

Quizplus · Accepted Answer

As the price of good 1 decreases, the substitution effect will encourage Ben to buy more of good 1 and less of good 2. However, since Ben's income and the price of good 2 did not change, there will be no income effect. Therefore, the only effect is the substitution effect, which will reduce the demand for good 2 and increase the demand for good 1.

Ben Consumes Two Goods and His Utility Function Is U(x1

Ben Consumes Two Goods and His Utility Function Is U(x₁