Exhibit 6-31
-Assume that a consumer is initially in equilibrium at point a in Exhibit 6-31. Then the price of good B falls. The movement from point a to point b represents
A) the substitution effect
B) the income effect
C) the substitution effect minus the income effect
D) the sum of the substitution and income effects
E) the income effect minus the substitution effect

Question

Exhibit 6-31 
-Assume that a consumer is initially in equilibrium at point a in Exhibit 6-31. Then the price of good B falls. The movement from point a to point b represents
A) the substitution effect 
B) the income effect 
C) the substitution effect minus the income effect 
D) the sum of the substitution and income effects 
E) the income effect minus the substitution effect

Quizplus · Accepted Answer

The movement from point a to point b represents both the substitution effect and the income effect. However, since the price of good B has fallen, the substitution effect dominates and the consumer substitutes toward good B, which explains the negative slope of the budget line. The income effect reinforces the substitution effect, causing the consumer to increase consumption of both goods. Thus, the movement from point a to point b represents the sum of the substitution and income effects.

Exhibit 6-31 -Assume That a Consumer Is Initially in Equilibrium at Point