For an economy with two goods, if the cross-price elasticity of demand is positive infinity, then the total effect of a price change is equal to this effect, and if the goods are perfect complements, then this effect is zero.
In the Merton lifetime portfolio selection problem, the value of this effect due to an increase in the mean of the composite portfolio goes to negative infinity as risk averseness goes to zero. For an economy with two goods, if the cross-price elasticity of demand is positive infinity, then the total effect of a price change is equal to this effect, and if the goods are perfect complements, then this effect is zero. An (*) inferior good for which this effect is smaller than a conjugate effect is known as a Giffen good. This effect equals the price derivative of the Hicksian demand or, by the Slutsky decomposition, equals the total price effect minus the income effect. For 10 points, identify this effect in which a price change prompts buyers to move from the purchase of one good to another.
In the Merton lifetime portfolio selection problem, the value of this effect due to an increase in the mean of the composite portfolio goes to negative infinity as risk averseness goes to zero.
substitution effect