Exhibit 5A-2
-Refer to Exhibit 5A-2. If the individual starts at point A and moves to point B as a result of an increase in the price of Y, then the amount of reduction in the consumption of Y is
A)45 due to the substitution effect and 25 due to the income effect.
B)25 due to the substitution effect and 20 due to the income effect.
C)25 due to both the substitution effect and income effect.
D)20 due to the substitution effect and 25 due to the income effect.
E)25 due to the substitution effect and 45 due to the income effect.

Question

Exhibit 5A-2 
-Refer to Exhibit 5A-2. If the individual starts at point A and moves to point B as a result of an increase in the price of Y, then the amount of reduction in the consumption of Y is
A)45 due to the substitution effect and 25 due to the income effect. 
B)25 due to the substitution effect and 20 due to the income effect. 
C)25 due to both the substitution effect and income effect. 
D)20 due to the substitution effect and 25 due to the income effect. 
E)25 due to the substitution effect and 45 due to the income effect.

Quizplus · Accepted Answer

The movement from point A to point B due to an increase in the price of Y typically involves both a substitution effect and an income effect. The substitution effect reflects the change in consumption as the individual substitutes away from Y towards other goods because it has become relatively more expensive. The income effect reflects the change in consumption due to the effective decrease in purchasing power from the price increase. The correct distribution between these effects, without seeing the exhibit, cannot be determined precisely. However, choice B suggests a logical distribution of effects, with a smaller portion attributed to the substitution effect (25) and a slightly smaller portion (20) to the income effect, which could reflect a typical consumer response to a price increase in a good.

Exhibit 5A-2 -Refer to Exhibit 5A-2. If the Individual Starts at Point