Use the following to answer question 70:
Figure: Water and Electricity 2
-(Figure: Water and Electricity 2) Refer to the figure. If the price of electricity changed and the price of water stayed the same, causing the change in the budget constraint as indicated by the dashed line, did an income effect play a role in the change in this person's consumption bundle?
A) No, because the new consumption point is on the same indifference curve.
B) No, because the new consumption point has less water, not more.
C) Yes, because there was a change in relative prices.
D) Yes, because after keeping utility constant this person still buys more electricity.

Question

Use the following to answer question 70:
Figure: Water and Electricity 2 
-(Figure: Water and Electricity 2) Refer to the figure. If the price of electricity changed and the price of water stayed the same, causing the change in the budget constraint as indicated by the dashed line, did an income effect play a role in the change in this person's consumption bundle?
A) No, because the new consumption point is on the same indifference curve. 
B) No, because the new consumption point has less water, not more. 
C) Yes, because there was a change in relative prices. 
D) Yes, because after keeping utility constant this person still buys more electricity.

Quizplus · Accepted Answer

The fact that the person still buys more electricity after keeping utility constant (moving from point A to point B on the same indifference curve) indicates that there is an income effect present. This is because the person's purchasing power has increased due to the decrease in the price of electricity, allowing them to purchase more of both goods even while keeping their overall level of satisfaction constant.

Use the Following to Answer Question 70