Topic 10 - Slutsky

Question 1

Income effect when px1 falls

Answer 1

Purchasing power increases. Money income will buy more of good 1

Question 2

Substitution effect when px1 falls

Answer 2

Rate of exchange between good 1 and good 2 changes. Gives up less of good 2 to get good 1.
The change in demand for a good that occurs when the relative price of that good changes in relation to other goods

Question 3

Pivot and shift

Answer 3

When px1 falls budget line rotates around m/p2 (pivot). Budget line also gets flatter (shift)

Question 4

Total change in demand =?

Answer 4

Substitution effect plus the income effect

Question 5

Perfect compliments

Answer 5

Zero substitution effect. Only income effect

Question 6

Perfect substitutes

Answer 6

Zero income effect

Question 7

Quasilinear preferences

Answer 7

No income effect for good 1

Question 8

Hicks substitution effect

Answer 8

The change in consumption bundle due to a price change, while keeping the consumer’s utility level the same