Problem 3 Consider an economy with two goods only. Use Slutsky decomposition for good 2 (Ar₂ = Ar + Ax₂) to prove the following: (a) If the price of good 1 decreases and good 2 is inferior, then good 2 is a gross substitute for good 1. (b) If the price of good 1 decreases and good 2 is normal, then under what condition is good 2 still a gross substitute for good 1? Under what condition is good 2 a gross complement for good 1?

Problem 3 Consider an economy with two goods only. Use Slutsky decomposition for good 2 (Ar₂ = Ar + Ax₂) to prove the following: (a) If the price of good 1 decreases and good 2 is inferior, then good 2 is a gross substitute for good 1. (b) If the price of good 1 decreases and good 2 is normal, then under what condition is good 2 still a gross substitute for good 1? Under what condition is good 2 a gross complement for good 1?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.10P

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