Refer to Exhibit 4. Assume a consumer is deciding between purchasing socks and belts, with an income of €100. If the price of socks decreases from €5 to €2 per pair, which movement illustrates the substitution effect?

Multiple choice question for Consumer Theory vs. Real Consumers. Select an option, then review the explanation below.

Explanation

The substitution effect is shown by the shift from point Z to point X, reflecting the consumer's tendency to buy more socks as their price drops, holding utility constant.

Practice related questions from the same subject.

1.Assuming that consumption during youth and old age are both normal goods, how does a rise in the interest rate affect the amount saved?
2.What happens to the budget line if both income and prices double simultaneously?
3.Based on Exhibit 4, assume a consumer has €100 to spend and must decide between purchasing socks or belts. How would you classify a pair of socks in this scenario?
4.When a rise in a consumer's income leads to a reduction in the amount of a product they buy, how is this product classified?
5.Consider a graph where the quantity of good X is represented on the x-axis and the quantity of good Y on the y-axis. If the indifference curves are concave toward the origin, how does the marginal rate of substitution of good Y for good X (the slope of the indifference curve) change as we move from a situation with a large amount of good X to one with a large amount of good Y?

Refer to Exhibit 4. Assume a consumer is deciding between purchasing socks and belts, with an income of €100. If the price of socks decreases from €5 to €2 per pair, which movement illustrates the substitution effect?

Explanation

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