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Slutsky Equation II
Example 1 (ctd.): Cobb-Douglas. Apply Slutsky
equation
∗ = ∗ =
Derivative of Hicksian demand with respect to price:
(p ) =
Rewrite ∗ as function of : (p (p )) Compute(p)=
• Substitution effect: (p(p)) =
• Income effect:
−∗(12)∗ (p) =
• Sum them up to get
∗ ( p ) =
• It works!
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Complements and substitutes
• Nicholson, Ch. 6, pp. 187-192
• How about if price of another good changes? •
Generalize Slutsky equation
