What does Slutsky preserve at the compensated point?
Price the old bundle at new prices to isolate substitution before restoring actual purchasing power.
Follow the cause and effect
Solve bundle A at original prices and income.
Calculate mS=p′·A and solve compensated bundle C.
Report A→C as substitution and C→B as income effect.
The model you are using
Conditions for this model
Shared experiment: U=√(xy), m=120, py=6, px 12→6, no goods endowment and fixed preferences. Practice uses the separate setup in step 5.
The exam trap
Point C is an analytical comparison, not a chronological event between A and B.
Connect the reasoning to the graph
What changes
- The Slutsky budget has the new slope and passes through A, though C may lie on another utility curve.
What stays fixed
Shared experiment: U=√(xy), m=120, py=6, px 12→6, no goods endowment and fixed preferences. Practice uses the separate setup in step 5.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
Report A→C as substitution and C→B as income effect.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Construct a Slutsky decomposition for a rise in px and check the sign of x substitution.