Economics • Economic BasicsHard
What does the 'Hicksian Demand Function' isolate compared to the 'Marshallian Demand Function'?
A. The income effect of a price change by holding utility constant
B. The substitution effect of a price change by holding nominal income constant
C. The substitution effect of a price change by holding utility constant✓ Correct Answer
D. The pure income effect by allowing prices to vary freely
💡 Solution & Explanation
Hicksian demand functions isolate the pure substitution effect resulting from a relative price change by keeping the consumer's utility level constant through hypothetical income compensation. In contrast, Marshallian demand functions hold nominal income constant, capturing both substitution and income effects when prices fluctuate. This distinction helps economists analyze consumer welfare changes following tax policy implementations.
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