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Consider a consumer whose preferences are defined over bundles of non- negative consumption quantities for each of two commodities: Widgets and a composite consumption commodity
Consider a consumer whose preferences are defined over bundles of non- negative consumption quantities for each of two commodities: Widgets and a composite consumption commodity known as "All Other Goods". This consumer's preferences are both rational and locally non-satiated. Denotethe price of \"Widgets by p1, the consumption of \"Widgets by ql, the price of \"All Other Goods" by p2, the consumption of \"All Other Goods" by qg, and the consumers income by 3;. Use the composite consumption commodity [that is, \"All Other Goods\") as the numeraire throughout this question. [In other words, assume that p2 = $1 throughout this question. Note that this assumption allows you to interpret the amount of \"All Other Goods\" con sumption as expenditure on \"All Other Goods\understate the true (or Hicksian) substitution effect that it is approx- imating? Does the revealed preference approximation to the income effect that you found in part 3 of this question overstate, exactly equal, or understate the true (or Hicksian) income effect that it is approximative? Justify your answers
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