Choose which is true:The substitution effect is shown by the movement from (Point A to Point B, Point A to Point C, Point B to Point C). Owing to the substitution effect, the Smiths (buy more wine in general because the price change has raised their purchasing power, buy more grade A wine and less grade B wine because the former has become relatively less expensive). The real-income effect is shown by the movement from (Point A to Point B, Point A to Point C, Point B to Point C). Owing to the real-income effect, the Smiths (buy more wine in general because the price change has raised their purchasing power, buy more grade A wine and less grade B wine because the former has become relatively less expensive). Grade A wine (bottles)10987LO+321BL2BLBLHABсI0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Grade B wine (bottles) John and Leslie Smith buy two grades of wine: Grade A, which they buy for special occasions, e.g., dinner parties, and Grade B,which they drink with their evening meals. The price of Grade A wine suddenly falls by half, encouraging them to drink at leastsome grade A wine (and somewhat less grade B wine) with their evening meals.The accompanying diagram shows the Smiths' initial wine budget constraint, BL₁, and the wine budget constraint they face, BL2,when the price of grade A wine falls. BL is a hypothetical budget line that reflects the new relative prices of the two kinds ofwine.a. Place point A to show the Smith's initial optimal consumption bundle and point C to show their final optimal consumptionbundle. Place point B to show a hypothetical optimal consumption bundle that reflects the new relative prices but controls forthe effects of the change in price on income.

The substitution effect is the decline in sales for a product that can be attributed to consumers…

Answered: The substitution effect is shown by the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Choose which is true:

The substitution effect is shown by the movement from (Point A to Point B, Point A to Point C, Point B to Point C). Owing to the substitution effect, the Smiths (buy more wine in general because the price change has raised their purchasing power, buy more grade A wine and less grade B wine because the former has become relatively less expensive). The real-income effect is shown by the movement from (Point A to Point B, Point A to Point C, Point B to Point C). Owing to the real-income effect, the Smiths (buy more wine in general because the price change has raised their purchasing power, buy more grade A wine and less grade B wine because the former has become relatively less expensive).

Grade A wine (bottles)
10
9
8
7
LO
+
3
2
1
BL2
BL
BL
H
A
B
с
I
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Grade B wine (bottles)

John and Leslie Smith buy two grades of wine: Grade A, which they buy for special occasions, e.g., dinner parties, and Grade B,
which they drink with their evening meals. The price of Grade A wine suddenly falls by half, encouraging them to drink at least
some grade A wine (and somewhat less grade B wine) with their evening meals.
The accompanying diagram shows the Smiths' initial wine budget constraint, BL₁, and the wine budget constraint they face, BL2,
when the price of grade A wine falls. BL is a hypothetical budget line that reflects the new relative prices of the two kinds of
wine.
a. Place point A to show the Smith's initial optimal consumption bundle and point C to show their final optimal consumption
bundle. Place point B to show a hypothetical optimal consumption bundle that reflects the new relative prices but controls for
the effects of the change in price on income.

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