6A-5 Income and Substitution Effects FIGURE 6-11 -Refer to Figure 6-11.Suppose the consumer begins at E₁.The income and substitution effects of the reduction in the price of X are represented as follows: A)the distance Q₁d shows the substitution effect and the distance Q₂e shows the income effect. B)the distance de shows the income effect and the distance cd shows the substitution effect. C)the distance Q₁Q₂ shows the income effect and the distance Q₂Q₃ shows the substitution effect. D)the distance Q₁Q₂ shows the substitution effect and the distance Q₂Q₃ shows the income effect. E)the distance Q₁Q₃ shows the substitution effect and the distance Q₂Q₃shows the income effect.

Question

Quizplus · Accepted Answer

The substitution effect is represented by the change in relative prices, which is the distance Q₁Q₂. The income effect is represented by the change in real income, which is the distance Q₂Q₃. Therefore, D is the correct choice.