The diagram illustrates a change in the price of a book, affecting the consumer's budget. The original budget line is Bc, while the new budget line, after the price change, is Bd. This shift is due to a lower price of books, allowing the consumer to afford more books with the same budget. The graph shows:- The vertical axis represents "Movies per month."- The horizontal axis represents "Books per month."- Points B, C, D, A, E, F, and G are marked along the budget lines and the curve.Explanation:- **Budget Line Bc**: This is the initial budget constraint, showing combinations of books and movies the consumer can afford before the price change.- **Budget Line Bd**: After the price change, this line shows the new combinations of books and movies that the consumer can now afford.- **Indifference Curves**: Indifference curves illustrate different combinations of goods that provide the consumer with the same level of satisfaction. Point A is on one indifference curve while points E and G are on others.The question asks about the substitution effect, which represents how consumers substitute one good for another when prices change, holding utility constant. It asks which movement between points best illustrates this effect:A. Movement from point A to point E. B. Movement from point A to point G. C. Movement from point F to point G. D. Movement from point A to point F. The substitution effect is typically shown by a movement along the same indifference curve from the initial choice to a new point after the price change, adjusting consumption to maximize utility given the new budget constraint.

Substitution effect is the change in the quantity consumed or demanded by a consumer due to a change in its price by shifting to its substitute. For instance, as the price of tea rises and that of coffee remains the same; consumers tend to shift from tea to coffee since coffee seems comparatively cheaper now. Substitution effect is the movement along the same indifference curve. So, that makes answer (b) and (d) incorrect. Substitution effect is the change in consumption with no change in income or purchasing power so that makes answer (c) incorrect. Thus, the correct answer is (a) as it is the movement along the same indifference curve and with no change in income or the purchasing power of the individual. Thus, the correct option is (a)

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Consider the change in the price of a book depicted in the diagram. The original budget line is Bc. The new budget line is Bd. As a result of this price change, the substitution effect can be represented by a movement from

Consider the change in the price of a book depicted in the diagram. The original budget line is Bc. The new budget line is Bd. As a result of this price change, the substitution effect can be represented by a movement from

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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