Which of the following statements is true
A)hicksian substitution effect is greater than slutsky substitution effect
B)slutsky substitution effect is greater than hicksian substitution effect
C)hicksian substitution effect is same and equal to slutsky substitution effect
D)hicksian substitution effect is the reverse of slutsky substitution effect

Question

Quizplus · Accepted Answer

The Slutsky substitution effect is greater than the Hicksian substitution effect because the Slutsky approach keeps utility constant by adjusting income to compensate for price changes, while the Hicksian approach directly adjusts the price, leading to a smaller substitution effect as it does not account for income effects.

Which of the Following Statements Is True