Slutsky equation

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The equation showing how the effect on demand for a good of a change in a price can be decomposed into a substitution effect, which is the effect of a change in relative prices at an unchanged level of utility, and an income effect, which is the effect of a change in real income holding prices constant. Denote the demand for good i by xi, the price of good j by pj, income by M, and utility by U. The Slutsky equation iswhere is the substitution effect and the income effect.

Subjects: Economics.

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