Herbie Consumes Two Goods and His Utility Function Is U(x₁

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.

Correct Answer:

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