Good Y Good X Answer the following questions with reference to the diagram above

Question

Good Y Good X Answer the following questions with reference to the diagram above. Assume that the consumer initially faces the budget line labelled BLi . The budget line then rotates inward to BL2 a. What would have caused this change in the budget line? s a e Using the labels on the graph, indicate the change in Good X that constitutes the substitution effect. Indicate the change in Good X that constitutes the income effect. Is Good X normal or inferior? How do you know? Is Good Xa Giffen Good? How do you know?

Explanation / Answer

A. Increase in price of good X has caused the change in budget line.

B. X3 to X2 shows substitution effect

C. X2 to X1 shows the income effect.

D. Increase in price of good has led to decrease in consumption of the same. Hence, its a normal good

E. No. A giffen good's consumption increases when its price increases.

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