-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 substitution effect can be represented by a movement from
A) point A to point F.
B) point F to point G.
C) point A to point G.
D) point A to point E.

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 substitution effect can be represented by a movement from
A) point A to point F. 
B) point F to point G. 
C) point A to point G. 
D) point A to point E.

Quizplus · Accepted Answer

The substitution effect, in economic terms, refers to the change in consumption patterns due to a change in the relative prices of goods, holding the consumer's utility constant. When the price of a book changes, the substitution effect isolates the impact of the price change on the quantity demanded, assuming the consumer's level of satisfaction (utility) remains the same. Moving from point A to point E represents the pure substitution effect of the price change, as it shows how the consumer would adjust their consumption between two goods (in this case, books and another good) if they were to remain on the same indifference curve (same level of utility) but faced a new budget constraint (BD instead of BC). This movement does not consider the income effect, which would further adjust the consumption choice to point F or G, depending on whether the book is a normal or inferior good.

-Consider the Change in the Price of a Book Depicted