A consumer is known to consume the bundle (4, 3, 12, 8) when the price vector...

A consumer is known to consume the bundle (4, 3, 12, 8) when the price vector is (2, 2, 1, 3). Suppose the price of the fourth commodity increases by one to 4. What income compensation would we need to provide to the consumer under Slutsky compensation?

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Expert Solution

Income compensation required:

Change in income = change in price * initial quantity

New income - old income= (new price of 4th good -old price of 4th good) * initial quantity of 4th good.

New income - old income = (4 - 3) * 8

New income = old income + 8

Thus income compensation required is 8 more than initial income with the consumer so that the utility remains constant under slutsky compensation.

Rahul Sunny answered 2 years ago

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