Question

Michelle spends all her money on food and clothing. When the price of clothing decreases, she buys more clothing.

In the diagram to the right, the substitution effect is defined by the movement from point :

a. A to B

b. A to C

c. B to C

d. C to D

Michelle spends all her money on food and clothing. When the price of clothing decreases, she buys more clothing. In the diagram to the right, the substitution effect is defined by the movement from point  

Answer 1

Substitution effect is from A to B. When consumer is in same level of income. And from point B to C is the Income effect when consumers budget luine is different. And monve ment from A to C is price effect.