Question
The question is: Maudes spends all of her income on delphinium and hollyhocks. Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one. If
The question is:
Maudes spends all of her income on delphinium and hollyhocks.
Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one. If delphiniums currently cost $4 per unit and hollyhocks cost $5 per unit and if the price of delphiniums rises to $7 per unit,
We have therefore an utility function of 1=1, that is U(xd,xm) = xd+xm:
I'm confused about the question, as it doesn't give Maude's Income. I'm therefore hesitating between answer 2 and 3, as we don't now here income
- 2/3 of the change in demand will be due to the income effect.
- there will be no change in the demand for hollyhocks.
-the entire change in demand for delphiniums will be due to the substitution effect.
-the income effect of the change in demand for delphiniums will be bigger than the substitution effect.
-1/3 of the change in demand will be due to the income effect.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started