Multiple Choice
Ben consumes two goods and his utility function is U(x1, x2) =x21x42.The price of good 2 does not change and his income does not change, but the price of good 1 decreases.
A) The income effect is zero, since his income remained constant.
B) The substitution effect on the demand for good 2 is zero, since the price of good 2 did not change.
C) The substitution effect reduces the demand for good 2, and since the income effect is zero, the demand for good 2 falls.
D) The substitution effect of the price change reduces the demand for good 2 and increases the demand for good 1.
E) More than one of the above statements is true.
Correct Answer:
Verified
Correct Answer:
Verified
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