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Figure 21-22 E C 2 3 6 7 8 9 Refer to Figure 21-22. When the price of X is $80, the price of Y is $20, and the consumer's income is $160, the consumer's optimal choice is D. Then the price of X decreases to $20. The income effect can be illustrated as the movement from D to E. OD to C. O C to E. O E to D. IC2 IC1

Figure 21-22 E C 2 3 6 7 8 9 Refer to Figure 21-22. When the price of X is $80, the price of Y is $20, and the consumer's income is $160, the consumer's optimal choice is D. Then the price of X decreases to $20. The income effect can be illustrated as the movement from D to E. OD to C. O C to E. O E to D. IC2 IC1

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Refer to Figure 21-22. When the price of X is $80, the price of Y is $20, and the consumer’s income is $160, the consumer’s optimal choice is D. Then the price of X decreases to $20. The income effect can be illustrated as the movement from Group of answer choices D to E. D to C. C to E. E to D.
### Understanding Consumer Choice and the Income Effect #### Figure 21-22 **Graph Explanation:** The graph illustrates the consumer's choice between two goods, X and Y, at different price and income levels. The axes represent quantities of good X (horizontal axis) and good Y (vertical axis). There are two indifference curves (IC1 and IC2) depicted, indicating different levels of consumer satisfaction. - **Indifference Curve IC1**: Shows a lower level of satisfaction. - **Indifference Curve IC2**: Shows a higher level of satisfaction. The initial budget constraint is the straight line that connects points D and another point on the vertical axis. The consumer's initial optimal choice is point D, where the budget line is tangent to indifference curve IC1. **Key Points on the Graph:** - **Point D**: Initial optimal choice when the price of X is $80, and the price of Y is $20. - **Point E**: New optimal choice after the price of X decreases to $20, causing the budget line to pivot. - **Point C**: Represents another consumption bundle on the graph but is not part of this particular question's analysis. **Shift in Budget Line**: When the price of X decreases to $20, the budget line pivots outwards from point D, allowing the consumer to reach a higher indifference curve (IC2) and choose a different combination of goods (point E). **Concepts Illustrated**: - **Income Effect**: The change in consumption resulting from a change in real income. In this scenario, when the price of X decreases, the consumer can afford more of both goods, effectively increasing their real income and moving the optimal choice from D to E. **Multiple Choice Question:** Refer to Figure 21-22. When the price of X is $80, the price of Y is $20, and the consumer’s income is $160, the consumer’s optimal choice is D. Then the price of X decreases to $20. The income effect can be illustrated as the movement from: - \( \quad \) O D to E. - \( \quad \) O D to C. - \( \quad \) O C to E. - \( \quad \) O E to D. **Answer: D to E** This movement from point D to point E demonstrates how the consumer's purchasing power increases, allowing them to reach a higher level of
Transcribed Image Text:### Understanding Consumer Choice and the Income Effect #### Figure 21-22 **Graph Explanation:** The graph illustrates the consumer's choice between two goods, X and Y, at different price and income levels. The axes represent quantities of good X (horizontal axis) and good Y (vertical axis). There are two indifference curves (IC1 and IC2) depicted, indicating different levels of consumer satisfaction. - **Indifference Curve IC1**: Shows a lower level of satisfaction. - **Indifference Curve IC2**: Shows a higher level of satisfaction. The initial budget constraint is the straight line that connects points D and another point on the vertical axis. The consumer's initial optimal choice is point D, where the budget line is tangent to indifference curve IC1. **Key Points on the Graph:** - **Point D**: Initial optimal choice when the price of X is $80, and the price of Y is $20. - **Point E**: New optimal choice after the price of X decreases to $20, causing the budget line to pivot. - **Point C**: Represents another consumption bundle on the graph but is not part of this particular question's analysis. **Shift in Budget Line**: When the price of X decreases to $20, the budget line pivots outwards from point D, allowing the consumer to reach a higher indifference curve (IC2) and choose a different combination of goods (point E). **Concepts Illustrated**: - **Income Effect**: The change in consumption resulting from a change in real income. In this scenario, when the price of X decreases, the consumer can afford more of both goods, effectively increasing their real income and moving the optimal choice from D to E. **Multiple Choice Question:** Refer to Figure 21-22. When the price of X is $80, the price of Y is $20, and the consumer’s income is $160, the consumer’s optimal choice is D. Then the price of X decreases to $20. The income effect can be illustrated as the movement from: - \( \quad \) O D to E. - \( \quad \) O D to C. - \( \quad \) O C to E. - \( \quad \) O E to D. **Answer: D to E** This movement from point D to point E demonstrates how the consumer's purchasing power increases, allowing them to reach a higher level of
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