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For an individual who consumes two of the good X and Y, the Marshallian demand function for X is flatter than the Hicskian demand function for X if X is a normal good
For an individual who consumes two of the good X and Y, the Marshallian demand function for X is flatter than the Hicskian demand function for X if X is a normal good.
Why is this false? Isn't it ALWAYS correct to say that for a normal good, Compensated demand curve is steeper than the Marshallian demand curve for a normal good.
Expert Solution
The statement is true given that X is a normal good.In general, the compensated demand curve is somewhat less responsive to price changes than is the uncompensated curve for a normal good. This is because the latter reflects both substitution(SE) and income effects(IE) of price changes,where as the compensated curve reflects only substitution effects.
Thus for a given price increase, the fall in demand is more in case of a marshallian demand function because both SE and IE are at play.In case of a price fall, the demand rises morel for marshallian demand function for the same reason as mentioned above, resulting in a flatter Marshallian demand curve and a steeper compensated demand curve.
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