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 income effect
A)decreases the consumption of both X and Y.
B)has no effect on the consumption of either X or Y.
C)increases the consumption of both X and Y.
D)decreases the consumption of X but increases the consumption of Y.
E)increases the consumption of X but decreases the consumption of Y.

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 income effect
A)decreases the consumption of both X and Y. 
B)has no effect on the consumption of either X or Y. 
C)increases the consumption of both X and Y. 
D)decreases the consumption of X but increases the consumption of Y. 
E)increases the consumption of X but decreases the consumption of Y.

Quizplus · Accepted Answer

When the price of good Y increases, the individual's purchasing power decreases, leading to a movement along the indifference curve to a point where less of Y (and possibly less of X) is consumed. This is known as the income effect. In this scenario, since the individual moves from point A to point B, it implies that they are consuming less of Y due to its increased price, and if they are consuming more of X, it's because X has become relatively cheaper or because they are substituting X for Y. Thus, the correct answer is that the income effect increases the consumption of X but decreases the consumption of Y.

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