Economics · Consumer Theory
Given below are two statements: Assertion (A): The Slutsky substitution effect is larger (in absolute value) than the Hicksian compensating variation substitution effect for a normal good when price rises. Reason (R): The Slutsky compensation restores the original consumption bundle, while Hicksian compensation only restores original utility; hence Slutsky over-compensates, resulting in a larger substitution effect. Choose the most appropriate answer from the options given below:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Both (A) and (R) are true, and (R) is the correct explanation of (A).✓
- 2Both (A) and (R) are true, but (R) is NOT the correct explanation of (A).
- 3(A) is true but (R) is false.
- 4(A) is false but (R) is true.
Correct answer
Both (A) and (R) are true, and (R) is the correct explanation of (A).
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