Answer to Question #207900 in Microeconomics for Blue

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: 

The two goods, skis, and bindings are perfect compliments, this, therefore, means that the substitution effect of a price change in bindings will be zero since you cannot substitute between these goods. After being compensated, you will still end up with the same bundle as where you began.

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