PROBLEM 3 – Slutsky Equation, Income Effect, Substitution Effect, and Total Effect There are two goods which quantities are to be denoted by x and y, while prices are denoted by px and py, respectively. There is a consumer whose income is to be denoted by I and utility by u. His expenditure function is known to be: *see image* Using slutsky equation, decompose the effect of an infinitesimal increase in Px on demand of good x.

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PROBLEM 3 – Slutsky Equation, Income Effect, Substitution Effect, and Total Effect

There are two goods which quantities are to be denoted by x and y, while prices are denoted by px and py, respectively. There is a consumer whose income is to be denoted by I and utility by u. His expenditure function is known to be: *see image*

Using slutsky equation, decompose the effect of an infinitesimal increase in Px on demand of good x.

u(27P P,)
3
1= r'(P, Py, u) =
4
Transcribed Image Text:u(27P P,) 3 1= r'(P, Py, u) = 4
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