FIGURE 6- 10
-Refer to Figure 6- 10. Suppose the consumer begins at E1. The income and substitution effects of the reduction in the price of X are represented as follows:
A) the distance Q1Q2 shows the income effect and the distance Q2Q3 shows the substitution effect.
B) the distance Q1Q2 shows the substitution effect and the distance Q2Q3 shows the income effect.
C) the distance Q1d shows the substitution effect and the distance Q2e shows the income effect.
D) the distance de shows the income effect and the distance cd shows the substitution effect.
E) the distance Q1Q3 shows the substitution effect and the distance Q2Q3 shows the income effect.

Question

FIGURE 6- 10
-Refer to Figure 6- 10. Suppose the consumer begins at E1. The income and substitution effects of the reduction in the price of X are represented as follows:
A) the distance Q1Q2 shows the income effect and the distance Q2Q3 shows the substitution effect. 
B) the distance Q1Q2 shows the substitution effect and the distance Q2Q3 shows the income effect. 
C) the distance Q1d shows the substitution effect and the distance Q2e shows the income effect. 
D) the distance de shows the income effect and the distance cd shows the substitution effect. 
E) the distance Q1Q3 shows the substitution effect and the distance Q2Q3 shows the income effect.

Quizplus · Accepted Answer

The substitution effect is the movement along the indifference curve from E1 to Q1Q2, which is the change in consumption of X due to the change in its price. The income effect is the movement from Q1Q2 to E2, which is the additional consumption that results from the increase in real income due to the price reduction. Therefore, the distance Q1Q2 shows the substitution effect and the distance Q2Q3 shows the income effect.

FIGURE 6- 10 -Refer to Figure 6- 10. Suppose the Consumer Begins at Consumer