Graph 22-7

-Refer to Graph 22-7. If the consumer is currently at point A on the graph shown, a change to point B as a result of a decrease in the price of potato chips would show the:
A) price effect
B) budget effect
C) substitution effect
D) income effect

Question

Graph 22-7
 
-Refer to Graph 22-7. If the consumer is currently at point A on the graph shown, a change to point B as a result of a decrease in the price of potato chips would show the:
A) price effect 
B) budget effect 
C) substitution effect 
D) income effect

Quizplus · Accepted Answer

A movement from point A to point B due to a decrease in the price of potato chips shows the substitution effect, which is the change in consumption patterns due to a change in the relative prices of two goods. The price effect represents the change in quantity demanded due to the change in price of a good, the budget effect represents the change in quantity demanded due to a change in income, and the income effect represents the change in consumption patterns due to a change in real income holding prices constant. However, since the question specifies that only a decrease in the price of potato chips has occurred, the income effect is held constant. Therefore, the substitution effect is the best answer.

Graph 22-7 -Refer to Graph 22-7. If the Consumer Is Currently at Consumer