Income/Substitution effects What is the difference between the Uncompensated (or Marshallian) demand, and the Compensated (or...

Income/Substitution effects

What is the difference between the Uncompensated (or Marshallian) demand, and the Compensated (or Hicksian) demand. Use whatever method, discuss the relative slope of the two demand curves for an inferior good.

Expert Solution

The Uncompensated or Marshallian Demand simply focuses on the relationship of the quantity demanded of commodity and the respective price of that commodity. On the other hand, the Compensated or Hicksian Demand focuses on the relationship between the price and quantity demanded of a commodity, with the assumption the utility level of the individual as well as the prices of the other goods in consideration are constant or do not change.

Marshallian Demand involves the maximization of an individual's utility subject to a budget constraint depicted by the income of the individual,whereas Hicksian Demand invloves minimizing the individual's expenditure on commodities subject to a certain level of utility.

In the case of an Inferior good, the Marshallian demand curve will slope downward but will be flatter than the Hicksian demand curve. the reason is that the substitution effect is stronger than the income effect in the case of the Marshallian demand curve.

Rahul Sunny answered 6 months ago

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