Asked by
Chloe Raike
on Dec 01, 2024
Verified
Neville from your workbook has a friend named Cedric.Cedric has the same demand function for claret as Neville, namely q = .02m - 2p, where m is income and p is price.Cedric's income is $6,000 and he initially had to pay a price of $40 per bottle of claret.The price of claret rose to $60.The substitution effect of the price change
A) reduced his demand by 24.
B) reduced his demand by 40.
C) reduced his demand by 56.
D) increased his demand by 40.
E) reduced his demand by 34.
Demand Function
A mathematical formula that describes the relationship between the quantity of a good or service demanded and its price, along with other factors like income and the prices of related goods.
Substitution Effect
The effect observed when consumers replace more expensive items with cheaper alternatives due to changes in relative price levels, affecting demand for goods.
- Explore the impact of changing prices on consumer demand by understanding substitution and income effects.
- Understand the distinctions between Slutsky and Hicks decomposition in explaining the substitution effect.
Verified Answer
AC
Learning Objectives
- Explore the impact of changing prices on consumer demand by understanding substitution and income effects.
- Understand the distinctions between Slutsky and Hicks decomposition in explaining the substitution effect.