Question

In: Economics

Consider the following utility function U(x,y)=x^r+y^r,0<r<1 Find the income effect and substitution effect? ...

Consider the following utility function U(x,y)=x^r+ y^r,0<r<1
Find the income effect and substitution effect?
Does the substitution effect increase or decrease when r increases?

Expert Solution

Solution:

Given

a)

Let find the substitution effect first

Substitution effect = change in quantity of x with change in quantity of Y.

Now,

Now applying y/x constant lets assume r increases

then

The substitution effect decreases with increase in r.

b)

Now considering income effect

Now,

Similarly,

Rahul Sunny answered 3 years ago

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