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

question 38

Multiple Choice

Herbie consumes two goods and his utility function is U(x₁, x₂) = x³₁x⁴₂. The price of good 2 does not change and his income does not change, but the price of good 1 decreases.

• A) The substitution effect of the price change reduces the demand for good 2 and increases the demand for good 1.
• B) The substitution effect reduces the demand for good 2, and since the income effect is zero, the demand for good 2 falls.
• C) The substitution effect on the demand for good 2 is zero, since the price of good 2 did not change.
• D) The income effect is zero, since his income remained constant.
• E) More than one of the above statements is true.

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Definitions:

Conduction

The transfer of heat or electricity through a substance, without movement of the material, typically occurring in solids.

Continental Rifts

Regions where the Earth's crust is being pulled apart due to tectonic forces, often leading to the formation of new ocean basins.

Igneous Rocks

Rocks formed through the cooling and solidification of magma or lava, classified as intrusive or extrusive based on where they solidify.

Melting Occurs

The process by which a solid becomes a liquid due to an increase in temperature and/or a decrease in pressure.