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:

Residual Value

The estimated amount that an asset is expected to realize at the end of its useful life.

Straight-Line Method

A depreciation method that allocates an equal amount of depreciation expense for an asset over its useful life.

Depreciation Rate

The rate at which an asset is depreciated over a specified period, often expressed as a percentage of its original cost.

Revaluation

The process of adjusting the book value of an asset or liability to reflect its current fair market value.