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 0 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. (a) 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. Quantity of good x
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 0 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. (a) 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. Quantity of good x
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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.
(a)
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.
Quantity of good X
Transcribed Image Text:c. For the consumption of good Y, the substitution effect
is greater than the income effect.
is equal to the income effect.
is less than the income effect.
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