Please see below. I need help with this. Please use the picture to move the part on the graph. Lorena uses her income to consume two goods. Originally,she was consuming at point (a), but then good X became sopopular that its price soared. This reduced her budget set andled her to consume at point (b).IC Oa. Move the line labeled BC and place it such that a newhypothetical budget line identifies the changes in consumptionattributed to the substitution effect.(а)IÇ 1Based on your new diagram, answer the questions.BC(b)b. For the consumption of good X, the substitution effectis greater than the income effect.Quantity of good Yis equal to the income effect.O is less than the income effect.c. For the consumption of good Y, the substitution effectO is greater than the income effect.is equal to the income effect.is less than the income effect.Quantity of good X

The budget line is a graphical representation of all possible combinations of the two commodities…

Answered: Lorena uses her income to consume two…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please see below. I need help with this. Please use the picture to move the part on the graph.

Lorena uses her income to consume two goods. Originally,
she was consuming at point (a), but then good X became so
popular that its price soared. This reduced her budget set and
led her to consume at point (b).
IC O
a. Move the line labeled BC and place it such that a new
hypothetical budget line identifies the changes in consumption
attributed to the substitution effect.
(а)
IÇ 1
Based on your new diagram, answer the questions.
BC
(b)
b. For the consumption of good X, the substitution effect
is greater than the income effect.
Quantity of good Y
is equal to the income effect.
O is less than the income effect.
c. For the consumption of good Y, the substitution effect
O is greater than the income effect.
is equal to the income effect.
is less than the income effect.
Quantity of good X

Expert Solution

Step 1

The budget line is a graphical representation of all possible combinations of the two commodities that can be purchased with given income and cost, so that the price of each the total of these combinations equals the customer's monetary earnings.
An indifference curve in economics connects points on a graph representing different quantities of two goods, points between which a consumer is agnostic.

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