The figure below shows a consumer maximizing utility at two different prices (the left panel)and the consumer's demand for good X at the same two prices of good X (the right panel).The price of good Y is $4.50.When the price of X increases from point S to point R along the demand curve,$___________ of income must be temporarily given to the consumer to isolate the substitution effect.
A)$175
B)$180
C)$200
D)$360
E)$400

Question

The figure below shows a consumer maximizing utility at two different prices (the left panel)and the consumer's demand for good X at the same two prices of good X (the right panel).The price of good Y is $4.50.When the price of X increases from point S to point R along the demand curve,$___________ of income must be temporarily given to the consumer to isolate the substitution effect. 
A)$175 
B)$180 
C)$200 
D)$360 
E)$400

Quizplus · Accepted Answer

The income effect can be isolated by holding the consumer's utility constant before and after the price change. To do so, we must give the consumer income equal to the price increase times the initial quantity demanded. The price of X increases from $7 to $9 along the demand curve, a $2 increase. At point S, the initial quantity demanded is 20, so the total income temporarily given to the consumer is $2 x 20 = $40. At point R, the initial quantity demanded is 10, so the total income temporarily given to the consumer is $2 x 10 = $20. Therefore, the total income given to the consumer to isolate the substitution effect is $40 + $20 = $60. However, the question is asking for the amount of income that must be given only for the increase from S to R, so the answer is $20 + $40 = $60, which is closest to option B) $180.

The Figure Below Shows a Consumer Maximizing Utility at Two