Consider an Alberta consumer whose utility function is U (X; Y) = 3X1/3Y2/3
This consumer receives income R = $300. Prices of goods are for Px = 5, and Py = 20
Questions :
1. Deduce the demands for good X and good Y

2. If Px = 3 how does the quantity demanded of good X change?

Substitution effect in the sense of Slutsky and income effect:
has. What would be the new income if it were to change at the same time as the price of Px = 5, and Py = 20

b. What would then be his demand for good X with this new income?

c How much is the substitution effect and the income effect?

6. The consumer’s demand for good X is determined by the function X* (Px, M) = M / 10Px , where Px denotes the price per unit of good X. Consumer’s income is 1600 euros, the price per unit of good X is 5 euros. Suppose that the price per unit of good X decreases by 3 euros (thus, the new price per unit of good X is 2 euros).

a) Find the total change in the quantity of good X demanded by this consumer (which is caused by this price change)?

b) Find the substitution effect associated with this price change by applying the Slutsky approach.

c) Find the income effect associated with this price change by applying the Slutsky approach.

Which of the following that will occur when the price of normal good falls?

a. The income effect and the substitution effect will work to increase the quantity demanded of goods whose price decreases due to an increase in purchasing power.

b. The income and substitution effect will work towards decreasing the demand of consumers because the purchasing power will relatively decrease from the fall of the price.

c. The substitution effect expresses that the sales of goods whose price rises to increase.

d. None of the above.

Quantity of Y Q1 Q2 Q3 Quantity of X FIGURE 6-11 21) Refer to Figure 6-11. Suppose the consumer begins at E1. The income and substitution effects of the reduction in the price of X are represented as follows: A) the distance Qid shows the substitution effect and the distance Q2e shows the income effect. B) the distance de shows the income effect and the distance cd shows the substitution effect. C) the distance QiQ2 shows the income effect and the distance Q2Q3 shows the substitution effect. D) the distance Q1Q2 shows the substitution effect and the distance Q2Q3 shows the income effect. E) the distance Q1Q3 shows the substitution effect and the distance Q2Q3 shows the income effect.