|
6. This is the last question about Fred. When the price of beer rose, Fred's consumption of beer changed. How did his consumption change due purely to the substitution effect?
Recall that we isolate the substitution effect by eliminating the income effect. Any change in demand after we remove the income effect must be due to the substitution effect. In question 2 we saw that Fred's initial consumption of beer was 6. After we compensated him for the income effect in question 5 he purchased 4 beers. Thus, his consumption of beer fell by 2 beers due to the substitution effect.
|
| Fred's Marginal Utility |
| Q |
MU Brats |
MU Beer |
| 1 |
16 |
11 |
| 2 |
14 |
10 |
| 3 |
12 |
9 |
| 4 |
10 |
8 |
| 5 |
8 |
7 |
| 6 |
6 |
6 |
| 7 |
4 |
5 |
| 8 |
2 |
4 |
|
