Figure 21-20

-Refer to Figure 21-20.Suppose that a consumer is originally at point R.Then the price of good X decreases.Which of the following represents the substitution effect of the price decrease?

Question

Figure 21-20
 
-Refer to Figure 21-20.Suppose that a consumer is originally at point R.Then the price of good X decreases.Which of the following represents the substitution effect of the price decrease?

Quizplus · Accepted Answer

The substitution effect represents the change in quantity demanded of a good due to a change in its relative price, while holding constant the satisfaction obtained from other goods. When the price of good X decreases, the consumer will substitute good X for other goods, such as good Y in this case. This results in a movement along the indifference curve from point R to a new point, which lies on a higher indifference curve and has a higher quantity of good X and a lower quantity of good Y. The new point is represented by point T, and therefore, the movement from point R to point T represents the substitution effect of the price decrease for good X.

Figure 21-20 -Refer to Figure 21-20.Suppose That a Consumer Is Originally at Consumer