Suppose u(x,y)=min(x,2y) and the price of X is 1, the price of Y is 1 and income is $12. If the price of X increases to 2, the income effect is supposed to be -1.

I keep getting zero for some reason. Gx(2,1,12)=4.8 and Gx(1,1,12)=8 while Hx(2,1,U)=4.8 and Hx(1,1,U)=8?

Why is it not zero? What am i doing wrong?

  • $\begingroup$ How and for what do you get zero? Why is what no zero? Also, its hard to understand what you are doing, which makes helping you find what you are doing wrong difficult. $\endgroup$ – BB King Nov 10 '16 at 17:28

For perfect complements, the substitution effect is 0 so the income effect = total price effect. When price of x = \$1 then the quantity demanded of y = 12/3 = 4 units (and quantity demanded of x = 2*y = 8 units). When the price of x increases to \$2 then the quantity demanded of y falls to 12/5 = 2.4 units, so quantity demanded of x falls to 2*2.4=4.8 units of x. Thus, the total price effect is 4.8 - 8 = -3.2 which is the same as the income effect.


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