Ben consumes two goods and his utility function is U(x₁, x₂)  x²₁x⁴₂.The price of good 2 does not change and his income does not change, but the price of good 1 decreases.

A) The income effect is zero, since his income remained constant.
B) The substitution effect on the demand for good 2 is zero, since the price of good 2 did not change.
C) The substitution effect reduces the demand for good 2, and since the income effect is zero, the demand for good 2 falls.
D) The substitution effect of the price change reduces the demand for good 2 and increases the demand for good 1.
E) More than one of the above statements is true.

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Deepak Dhoni · Accepted Answer

Final Answer : D, Explanation :  As the price of good 1 decreases, the substitution effect will encourage Ben to buy more of good 1 and less of good 2. However, since Ben's income and the price of good 2 did not change, there will be no income effect. Therefore, the only effect is the substitution effect, which will reduce the demand for good 2 and increase the demand for good 1.

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