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Ques: Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratio of 2 units of Good 2 per unit of Good 1. If a consumer has income 120 and if the price of good 2 changes from 3 to 4,
while the price of good 1 stays at 1, then the income effect of the price change
(a) is 4 times as strong as the substitution effect.
(b) does not change demand for good 1.
(c) accounts for the entire change in demand.
(d) is exactly twice as strong as the substitution effect.
(e) is 3 times as strong as the substitution effect.
Ans: U= min(x,2y), s.t. x+3y=120
So, x=24, y=48
Now, change in m= 48*1=48
Substitution effect=4
Income effect=-8
So, answer (d).
Am I correct?? Please reply.
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