describe verbally two di§erent ways in which the Slutsky equation can be used to analyze consumer behavior (as expressed in consumption data). 2
The compensated and the uncompensated demand, i.e. the Marshallian and Hicksian demand function, can be related through the Slutsky equation. The Slutsky equation can be derived from the equality x i (p; E (p; U)) = h i (p; U), where p is the vector of prices p = (p1; :::; pn). (a) State (or derive and state) the Slutsky equation and brieáy explain all the terms appearing in the Slutsky equation. (b) Graphically illustrate the content of the Slutsky equation holds, carefully labelling all the objects that enter the graphic. (c) Brieáy describe verbally two di§erent ways in which the Slutsky equation can be used to analyze consumer behavior (as expressed in consumption data). 2
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