You consume only steak and lobster. Your substitution effect from a drop in the price of lobster is measured by a movement along your indifference curve between steak and lobster.

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in consumption of one good due to a change in the relative price of another good, holding the consumer's utility constant. In this case, a drop in the price of lobster would lead to a decrease in the relative price of lobster compared to steak, and the consumer would therefore substitute lobster for steak, moving along the same indifference curve between the two goods. Therefore, the statement is true.

You Consume Only Steak and Lobster