Reference: Ref 23-7 (Figure: Income and Substitution Effects) Refer to the figure. What caused this consumer to switch optimal consumption bundles from Bundle A to Bundle B?
A) a decrease in consumer income available for music downloads
B) a decrease in the price of music downloads
C) an increase in the price of music downloads
D) an increase in the price of movie downloads

Question

Reference: Ref 23-7 (Figure: Income and Substitution Effects) Refer to the figure. What caused this consumer to switch optimal consumption bundles from Bundle A to Bundle B?
A) a decrease in consumer income available for music downloads 
B) a decrease in the price of music downloads 
C) an increase in the price of music downloads 
D) an increase in the price of movie downloads

Quizplus · Accepted Answer

The consumer switched from Bundle A to Bundle B due to a change in the price of music downloads, as shown by the movement along the budget constraint from point A to point B. The decrease in the price of music downloads caused the budget constraint to pivot outward, increasing the amount of music downloads the consumer can purchase for the same level of income. As a result, the consumer substitutes music downloads for movie downloads, which are now relatively more expensive, and moves to a higher level of utility at point B. This is the substitution effect. However, the decrease in the price of music downloads also increases the consumer's purchasing power or real income, which allows the consumer to increase consumption of both music and movie downloads. This is the income effect. The net effect of the decrease in the price of music downloads (i.e., the combined effect of the substitution and income effects) is shown by the movement from point A to point C, which represents the new optimal consumption bundle.

Reference: Ref 23-7 (Figure: Income and Substitution Effects) Refer to the Figure