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-(Figure: Income and Substitution Effects) Use Figure Income and Substitution Effects.Carlos is originally consuming his optimal consumption bundle at point A when the price of gasoline falls.The movement from K₁ to K₂ reflects the _____ the decrease in the price of gasoline.

Question

Use the following to answer questions :

-(Figure: Income and Substitution Effects) Use Figure Income and Substitution Effects.Carlos is originally consuming his optimal consumption bundle at point A when the price of gasoline falls.The movement from K₁ to K₂ reflects the _____ the decrease in the price of gasoline.

Quizplus · Accepted Answer

The movement from point A to K₁ reflects the initial increase in purchasing power due to the decrease in the price of gasoline. However, the movement from K₁ to K₂ is solely due to the substitution effect of the price change, where Carlos is now able to substitute the relatively cheaper gasoline for other goods in his consumption bundle. Therefore, the correct choice is C, the substitution effect of the decrease in the price of gasoline.

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