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
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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
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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F22e84192-4b16-4dc2-817c-afb771201e2b%2F3efa0c9e-4f01-4748-aa01-abdb457dfd0b%2Fmxn8aux_processed.jpeg&w=3840&q=75)
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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