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

question 51

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:

Ratio

A relationship between two numbers indicating how many times the first number contains the second or how the two numbers compare in size.

Median

The middle value in a set of data when it is ordered from least to greatest, or the point at which half the data values are above and half are below.

Median

The middle value in a set of ordered data, or the average of the two middle values when the set has an even number of observations.

Absolute Frequency

The count of occurrences or instances of a particular event or property in a dataset.