The substitution effect graphically is always denoted:
A)by movement along the original indifference curve, whereas the income effect is represented by a rotation of the budget line.
B)by moving in the direction of the item that is becoming relatively more expensive.
C)by moving in the direction of the item that is becoming relatively cheaper and the income effect is always denoted by a rotating budget line.
D)by movement along the original indifference curve, whereas the income effect is represented by a parallel shift of the budget line.

Question

Quizplus · Accepted Answer

The substitution effect is represented by movement along the original indifference curve as the relative price of goods changes. The income effect is represented by a parallel shift of the budget line as income changes.

The Substitution Effect Graphically Is Always Denoted