A consumer has the demand function x* = x1(P1, m). When the price of good one...

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A consumer has the demand function x* = x1(P1, m). When the price of good one decreases, we observe a substitution effect of

business economics

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Answer 1

Answer #1

Total effect = SE + IE = -3.9 + 1 = -2.9
So, quantity of good 1 decreases by 2.9 units with decrease in its price. So, good 1 is a giffen good because quantity of giffen good decrease with decrease in price.

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Answer 2

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A consumer has the demand function x* = x1(P1, m). When the price of good one...

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