True or False: when goods are perfect complements, a change in price leads to an income...

True or False: when goods are perfect complements, a change in price leads to an income effect equal to the overall effect. When goods are perfect substitutes, a change in price leads to a substitution effect equal to the overall effect. Explain.

Expert Solution

True

When there are perfect complements, the goods are always used in a fixed proportion and they are not substituted against each other. This implies that even if the price of any of the good changes, there will be no substitution and hence no substitution effect. Similarly when the goods are perfect substitute consumer jumps on the relatively cheaper good and therefore, the entire change in the real income is spent on one good. Hence there is no income effect

Rahul Sunny answered 2 years ago

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