-Consider the change in the price of a book depicted in the above figure. The original budget line is BC. The new budget line is BD. As a result of this price change, the substitution effect can be represented by a movement from
A) point A to point E.
B) point A to point G.
C) point F to point G.
D) point A to point F.

Question

-Consider the change in the price of a book depicted in the above figure. The original budget line is BC. The new budget line is BD. As a result of this price change, the substitution effect can be represented by a movement from
A) point A to point E. 
B) point A to point G. 
C) point F to point G. 
D) point A to point F.

Quizplus · Accepted Answer

The substitution effect is the change in consumption of a good due to a change in its relative price. In this case, the price of the book has decreased, so the substitution effect will lead to an increase in the consumption of books. This is represented by a movement from point A to point E, where the consumer is consuming more books and less of the other good.

-Consider the Change in the Price of a Book Depicted