Answer to Question #207509 in Microeconomics for Chilu

Question

Let us assume two goods, skis and bindings, that are perfect complements. That is one-for-one complements. Maureen spends all her equipment budget of US$1,200 per year on these two goods. Skis and bindings each cost US$ 200 per pair. What will be the income and substitution effects of an increase in the price of bindings to US$ per pair?  

Answer 1

Solution:

Since the two goods, skis and bindings, are perfect compliments, the substitution effect of a price change in bindings will be zero.

On the other hand, the income effect due to an increase in the price of bindings will be equal to the total change. Therefore, there will be a fall in the real income due to the bindings price change which will affect both the demand of skis and bindings.