No changes in px will have any income or substitution effect

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Thirsty Ed drinks only pure spring water, but he can purchase it in two different-sized containers - .75 liter and 2 liter. Because the water itself is identical, he regards these two “goods” as perfect substitutes. a. Assuming Ed’s utility depends only on the quantity of water consumed and that the containers themselves yield no utility, express this utility function in terms of quantities of .75L containers (X) and 2L containers (Y). b. What would the compensated demand curve for X look like in this situation? The products are perfect substitutes. So when X is being purchased, any further price reduction results in an increase in X solely due to income effects. Abstracting out this income effect would leave the quantity of X unchanged. On the other hand, beyond the switch point, only Y is consumed and no changes in Px will have any income or substitution effect.

Reference no: EM13148946

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