Economics • Economic BasicsHard
In the context of the Hicksian demand function, how does it differ from the Marshallian demand function?
A. Hicksian demand holds utility constant and varies price while isolating substitution effects, whereas Marshallian demand holds nominal income constant.✓ Correct Answer
B. Hicksian demand assumes fixed market prices while Marshallian demand assumes variable prices.
C. Hicksian demand accounts exclusively for the income effect of a price change.
D. Marshallian demand incorporates compensated price changes while Hicksian demand uses uncompensated price changes.
💡 Solution & Explanation
The Hicksian demand function is a compensated demand curve that holds utility constant while varying market prices, thereby isolating the pure substitution effect of a price change. Conversely, the Marshallian demand function assumes constant nominal income and includes both substitution and income effects when prices fluctuate. Microeconomic theory utilizes Hicksian compensation concepts to analyze consumer welfare changes through measures like compensating variation and equivalent variation. Graphical derivations of these curves form a standard topic in advanced economic analysis.
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