The substitution effect of a price decrease for a good with a normal indifference curve pattern is graphed by?

A. drawing a new budget line tangent to the indifference curve attained at the new price.

B. drawing a new budget line tangent to the original indifference curve but at the slope of the new price of the good.

C. drawing a new budget line parallel to the initial budget line but tangent to the indifferent curve attained at the new price.

D. doing none of the above because the substitution effect cannot be graphed.

Solutions

Expert Solution

(1.) The substitution effect of a price decrease for a good with a normal indifference curve pattern is graphed by:

(B.) drawing a new budget line tangent to the original indifference curve but at the slope of the new price of the good.

Explanation

When we drawing a new budget line tangent to the original indifference curve but at the slope of the new price of the good, means we measure the change in quantity of a good who's price is decreased, keeping the utility same. Therefore, for substitution effect, draw a new budget line tangent to the original indifference curve but at the slope of the new price of the good.

Rahul Sunny answered 1 year ago

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