Answer to Question #261831 in Microeconomics for dcfgvhbjn

Question

With respect to Cobb Douglas preferences more generally, what happens to the demand for each of two products (say, x and y) when the price of one product (say, x) changes as a result of the: (i) substitution effect; and, (ii) income effect?

Answer 1

i)When product x and y are substitutes, a price increase for x will raise demand for y, whereas a price decrease for x will decrease demand for y.

Similarly, if the price of product y grows, demand for x rises, and if the price of y falls, demand for y falls cateris peribus.

ii) As income rises, so does demand for product x and y, and as income falls, so does demand for the products, cateris peribus.