Discrepancy between Hicksian and Slutsky Decomposition

In summary, the conversation discusses the different interpretations of a graph depicting a negative price change for commodity X. The Slutsky decomposition suggests that X is a normal commodity, while the Hicksian decomposition suggests the opposite. The individual is unsure if there is anything wrong with their graph or if there is a correct interpretation of it.
  • #1
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I have drawn such a graph, but the two different methods of decomposition under a negative price change of commodity X have revealed two different natures of commodity X - the Slutsky decomposition concludes that X is normal, while the Hicksian decomposition yields the opposite conclusion. Is there anything that I have done wrong, or if my graph is fine, what would be the correct interpretation of it?

Thanks a lot for helping.

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  • #2
Thanks for the post! Sorry you aren't generating responses at the moment. Do you have any further information, come to any new conclusions or is it possible to reword the post?
 

What is the Discrepancy between Hicksian and Slutsky Decomposition?

The Discrepancy between Hicksian and Slutsky Decomposition is a concept in economics that refers to the difference in the decomposition of an individual's demand for a good into two components: the substitution effect and the income effect.

What is the difference between the substitution effect and the income effect?

The substitution effect refers to the change in the quantity of a good demanded due to a change in its relative price, while holding real income constant. On the other hand, the income effect refers to the change in the quantity of a good demanded due to a change in real income, while holding relative prices constant.

Why is there a discrepancy between Hicksian and Slutsky Decomposition?

The discrepancy between Hicksian and Slutsky Decomposition arises due to the different assumptions made by each theory. Hicksian Decomposition assumes that the consumer's real income remains constant even after a price change, while Slutsky Decomposition assumes that the consumer's purchasing power remains constant.

How do the substitution and income effects affect demand?

The substitution effect and the income effect have opposite effects on demand. The substitution effect leads to a decrease in the quantity demanded of a good when its price increases, while the income effect leads to an increase in the quantity demanded when income increases.

What are the practical implications of the Discrepancy between Hicksian and Slutsky Decomposition?

The discrepancy between Hicksian and Slutsky Decomposition has important implications for consumer behavior and policy-making. It helps economists understand how consumers respond to changes in prices and income, and how these changes affect market demand. It also provides insights into how government policies, such as taxes and subsidies, can impact consumer behavior and market outcomes.

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