Suppose that Jim uses his budget to purchase 100 units of Good X and 100 units...

Suppose that Jim uses his budget to purchase 100 units of Good X and 100 units of Good Y. When the price of Good X rises, he purchases 55 units of Good X and 95 units of Good Y. An economist calculates his compensated budget and finds that in that scenario, Jim would buy 60 units of Good X and 105 units of Good Y.

Calculate the substitution effect.

(Remember to include a negative sign (-) if the effect reduces the quantity.)

Solutions

Expert Solution

ANS.

initial , x1 = 100 units y1 = 100 units

final, x2 = 55 units y2 = 95 units

compensated, x3 = 60 units y3 = 105 units

substituion effect= compensated budget - initial budget = x3 -x1 = 60 - 100 = -40 ans

Rahul Sunny answered 2 years ago

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