If an individual's budget constraint shifts,the individual's changes in consumption can be broken down into _____ and _____ effects.
A)budget;consumption
B)income;substitution
C)utility;indifference
D)wealth;savings

Question

Quizplus · Accepted Answer

When an individual's budget constraint shifts, they may experience both income and substitution effects. Income effect refers to the change in consumption due to the change in purchasing power, while substitution effect refers to the change in consumption due to the change in relative prices of goods. Therefore, option B is the correct answer. A is incorrect as budget and consumption are not separate effects. C is incorrect as utility and indifference describe the level of satisfaction an individual derives from consuming goods, whereas this question is about changes in consumption. D is incorrect as wealth and savings do not necessarily relate to changes in consumption following a shift in the budget constraint.

If an Individual's Budget Constraint Shifts,the Individual's Changes in Consumption