Figure 17-4

-Refer to Figure 17-4.Which of the following is true at W₀?
A)The income effect is larger than the substitution effect.
B)The substitution effect is larger than the income effect.
C)The income effect and the substitution effect are equal.
D)The supply curve is negatively sloped.

Question

Figure 17-4
 
-Refer to Figure 17-4.Which of the following is true at W₀?
A)The income effect is larger than the substitution effect. 
B)The substitution effect is larger than the income effect. 
C)The income effect and the substitution effect are equal. 
D)The supply curve is negatively sloped.

Quizplus · Accepted Answer

At point W₀, the quantity of X is higher than the original quantity of X, but the consumer is spending the same amount of money as before. This means the income effect is zero. The increase in quantity demanded of X is due entirely to the substitution effect. Therefore, option B is correct. The other options are not applicable to this diagram.

Figure 17-4 -Refer to Figure 17-4.Which of the Following Is True at Following