Figure: Income and Substitution Effects
(Figure: Income and Substitution Effects) Look at the figure Income and Substitution Effects.Carlos is originally consuming his optimal consumption bundle at point A in the figure when the price of gasoline falls.The movement from K1 to K2 reflects:

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in consumption of a good due to a change in its relative price, holding the consumer's real income constant. In this case, the price of gasoline has decreased, making it relatively cheaper than other goods. As a result, Carlos will substitute away from other goods and consume more gasoline, moving from K1 to K2.