### Identify the substitution effect of the price change

##### Reference no: EM131003466

Consider three agents with the respective utility functions: uA(x,y)= xy (MRS(x,y)= y) x uB (x, y) = x + y (perfect substitutes) uC (x, y) = min{x, y} (perfect complements) Assume each agent has income \$120 and initially faces the prices px = \$1 and py = \$2. Then suppose the price of x were to increase to \$4. Identify the substitution effect of the price change on each individual’s demand for x. (Hint 1: For agent A, what two properties determine the location of “z”, the reference point for distinguishing the income and substitution effects? Hint 2: For agents B and C, identify the substitution effect graphically.)

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