The Slutsky equation Flashcards
1
Q
What does the Slutsky equation tell us?
A
Whether a good is normal, inferior or Giffen
2
Q
From the Slutsky equation when is a good normal?
A
When dd1/dp1 = dh1/dp1 - (dd1/dm)d1 < 0
3
Q
From the Slutsky equation when is a good inferior?
A
When dd1/dp1 = dh1/dp1 - (dd1/dm)d1 < 0
4
Q
From the Slutsky equation when is a good a Giffen?
A
When dd1/dp1 = dh1/dp1 - (dd1/dm)d1 > 0
5
Q
How do you calculate the total effect from a Cobb-Douglas utility function?
A
- Solve by substitution to find the original bundle
- Find the final bundle using the new price
- Subtract the two to find the total effect
6
Q
How do you find the income effect from a Cobb-Douglas utility function?
A
- Find the indirect utility function by plugging in the Marshallian demand functions to the utility function
- Plug the given numbers into indirect utility function for initial utility
- Sub M’ into indirect utility function and solve for it
- Plug M’ and p1’ into x1’’ Marshallian function for income effect
7
Q
How do you find the substitution effect from a Cobb-Douglas utility function?
A
Subtract the original Marshallian demand from the income effect i.e x1’‘-x1
