Figure 17-4 -Refer to Figure 17-4.Which of the following is true at W₀?

Question

Quizplus · Accepted Answer

At W₀, the consumer has moved from point A to point B, indicating a decrease in the price of good 1. The movement from A to B can be decomposed into the income effect and substitution effect. At point B, the consumer is consuming less of good 2 and more of good 1. This indicates a substitution effect where the consumer is substituting good 1 for good 2 due to the decrease in price of good 1. However, the consumer is also experiencing an increase in real income due to the decrease in price of good 1. This could result in the consumer consuming more of both goods 1 and 2, which is the income effect. In this case, the substitution effect is larger than the income effect as the consumer is consuming less of good 2 and more of good 1. Hence, the correct answer is B.

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