Use the figure below to answer the following questions. Figure 9.3.3
-Consider an initial budget line labelled RS in Figure 9.3.3.If the budget line becomes RT,the substitution effect is illustrated by the move from point
A)A to B.
B)A to C.
C)A to D.
D)B to D.
E)D to C.

Question

Use the figure below to answer the following questions.  Figure 9.3.3
-Consider an initial budget line labelled RS in Figure 9.3.3.If the budget line becomes RT,the substitution effect is illustrated by the move from point
A)A to B. 
B)A to C. 
C)A to D. 
D)B to D. 
E)D to C.

Quizplus · Accepted Answer

The substitution effect occurs when the price of one good (in this case, the price of food) changes while the price of the other good (in this case, clothing) and income remain constant. When the budget line shifts from RS to RT, the price of food becomes relatively cheaper, causing the consumer to substitute away from clothing and towards food. This means that the optimal choice of the consumer will move from point A to point B, where they will consume more food and less clothing.

Use the Figure Below to Answer the Following Questions