points in order from left to right as they would appear on the graph.) P P2 so f

Question

points in order from left to right as they would appear on the graph.) P P2 so form-14, D1-2, andh" 1, the quantities of the two goods de manded is A-(L quantities of the two goods demanded is C quantities of the two goods demanded isc-( x ). Therefore, th price effect ) which yields the old utility level of s obtain x1 x nits of good 1. Therefore, B x ). Thus, the substitution effect is 2 . Sincethe old utity level is! 0 Type here to search -units of good 1, while the the i come emect is : ..x , set xi .Zy-- --X wits of good

Explanation / Answer

Hicksian decomposition calculates substitution effect by keeping utility at the old level. Hence, the blanks of the question can be filled up like this:

For m = 14, p1 = 2, and p2 = 1, the quantities of the two goods demanded is A = (5, 4), which yields the old utility level of u = 9. For m = 14, p1 = 1, and p2 = 1, the quantities of the two goods demanded is C = (13, 1). Therefore, the price effect is 8 units of good 1.

To figure out the substitution effect, we have x2 = 1. Since the old utility level is 9, set the utility function = 9 to obtain x1 = 7. Therefore, B = (7, 1). Thus, the substitution effect is 2 units of good 1, while the income effect is 6 units of good 1.

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