Question

In a two goods (x and y) world, two districts (A and B) are identical, except the prices of good x (Px) and good y (Py) are higher and lower in district A, respectively. Suppose two identical individuals (i.e. same preferences and income) live in the two districts separately and their optimal choices are interior solutions. Evaluate the following statement: ‘The MRS at the optimal choices of two individuals are the same’. True, false, or uncertain? Explain your answer intuitively and graphically.

Answer 1

Assess the effect of this bias on substitution and the effect on income using the Hicksian technique.

Explanation

Fee exchange changes the quantity requested in the consumer's inventory. This is called a fee effect. For this reason, this price effect has consequences, ie a substitution effect and an impact on profits.

for example, a client consumes two

Commodities X and Y, valued at Px and Py. If

The rate of individual X increases to Px. Next

The rate of one product drops, the consumer replaces inexpensive goods with more expensive ones. This approach is called the substitution effect.

In line with Hicks 'earnings-canceling approach, we simply reduce the income of buyers' coins. Consumer equilibrium adjusts from correct Y to correct X. Which means that increasing the quantity demanded for the commodity X is the most convenient due to the substitution effect.

We obtain the effect on profits by subtracting the effect of substitution from the total effect of price.