Question 15 · Microeconomía II UPF 2016

Question 15 (4 points). Hicks decomposition and good classification

Lucía has an income of 120 to spend on clothing ($x_1$) and other goods ($x_2$). At prices $p_1 = 3$ and $p_2 = 1$, she purchases the bundle $(30, 30)$. When prices change to $p'_1 = 1$ and $p'_2 = 1$, the Hicks substitution effect for good 1 is $\bar{\Delta} x_1^S = +9$ and the Hicks income effect is $\bar{\Delta} x_1^I = -5$. Consequently, we can conclude that for Lucía: