FIGURE 6-11
-Refer to Figure 6-11. Suppose the consumer begins at E 1. The income and substitution effects of the reduction in the price of X are represented as follows:
A) the distance Q1d shows the substitution effect and the distance Q2e shows the income effect.
B) the distance de shows the income effect and the distance cd shows the substitution effect.
C) the distance Q1Q2 shows the income effect and the distance Q2Q3 shows the substitution effect.
D) the distance Q1Q2 shows the substitution effect and the distance Q2Q3 shows the income effect.
E) the distance Q1Q3 shows the substitution effect and the distance Q2Q3 shows the income effect.

Question

FIGURE 6-11
-Refer to Figure 6-11. Suppose the consumer begins at E 1. The income and substitution effects of the reduction in the price of X are represented as follows:
A) the distance Q1d shows the substitution effect and the distance Q2e shows the income effect. 
B) the distance de shows the income effect and the distance cd shows the substitution effect. 
C) the distance Q1Q2 shows the income effect and the distance Q2Q3 shows the substitution effect. 
D) the distance Q1Q2 shows the substitution effect and the distance Q2Q3 shows the income effect. 
E) the distance Q1Q3 shows the substitution effect and the distance Q2Q3 shows the income effect.

Quizplus · Accepted Answer

The distance Q1Q2 shows the substitution effect, as the consumer switches from X to Y due to the lower price of X. The distance Q2Q3 shows the income effect, as the consumer moves to a higher indifference curve due to the increase in purchasing power resulting from the lower price of X.

FIGURE 6-11 -Refer to Figure 6-11. Suppose the Consumer Begins at E