True/False - Briefly explain the reason. a. The utility function U(X1,X2)=X1^a +

Question

True/False - Briefly explain the reason.

a. The utility function U(X1,X2)=X1^a + 2X2^b. Corresponds to preferences for perfect substitutes.

b. All ordinary (non-Giffen) goods are also normal goods. (Hint: Use the Slutsky equation to support your answer)

c. If consumer consumes only two goods, both of them can be inferior.

d. If a consumer is making an optimal choice between two goods, x and y then, independently of his preferences, the MRS = (-PX)/(-PY) condition must always hold.

e. Any Giffen good is an inferior good. (Hint: Use the Slutsky equation to support your answer)

Explanation / Answer

a. True as the functional form is such that there is no income effect , there is just substitution effect

b. False as ordinary goods can also be inferior.

c. False as if both are inferior then if the price of both the goods increases then consumption increases

d. True as this condition doesn't depend on preference of consumer.

e. True as  In case of giffen goods, the negative income effect is always greater than the positive substitution effect (true for Giffen goods, but not all inferior goods). Since Giffen goods always always have negative income effects, they must always be inferior goods

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