-Consider the change in the price of a book depicted in the above figure. The original budget line is BC. The new budget line is BD. As a result of this price change, the income effect can be represented by a movement from
A) point G to point F.
B) point E to point F.
C) point G to point A.
D) point A to point F.

Question

-Consider the change in the price of a book depicted in the above figure. The original budget line is BC. The new budget line is BD. As a result of this price change, the income effect can be represented by a movement from
A) point G to point F. 
B) point E to point F. 
C) point G to point A. 
D) point A to point F.

Quizplus · Accepted Answer

The income effect describes how a consumer's purchasing power is affected by a change in the price of goods, holding their utility constant. When the price of a book decreases, the consumer can afford more of the book without spending more money, effectively increasing their real income. The movement from point E to point F represents this change, as it shows the consumer's adjustment to the new price while staying on the same indifference curve, indicating the same level of utility or satisfaction.

-Consider the Change in the Price of a Book Depicted