Figure 14.3

-Refer to Figure 14.3.Which of the following is true at W₀?

Question

Figure 14.3
 
-Refer to Figure 14.3.Which of the following is true at W₀?

Quizplus · Accepted Answer

At point W₀, the consumer is consuming Q₀ amount of the good, given the budget constraint BC₀. If the price decreases, the budget constraint will shift to the right, and the consumer will move to a higher indifference curve on which the MRS = Px/Py. The substitution effect at W₀ is the movement from point W₀ to point W₁ along the same indifference curve, given the new budget constraint BC₁. The income effect at W₀ is the movement from point W₁ to point W₂ on a higher indifference curve, given that the consumer's real income has increased as a result of the price change. We can see that the substitution effect is larger than the income effect at W₀, because the movement from W₀ to W₁ is larger than the movement from W₁ to W₂. Therefore, choice B is correct. The supply curve cannot be determined from the given information.

Figure 14.3 -Refer to Figure 14.3.Which of the Following Is True at Following