Economics (AS & A Level) · Oct / Nov 2022 · Paper 32 · Question 6
9708Indifference curves and budget lines
When the price of a good increases, which statement is correct according to the analysis that uses budget lines and indifference curves?
- AThe income and substitution effects of the price increase will work in opposite directions in the case of a Giffen good.
- BThe income effect of the price increase will result in reduced consumption for all goods.
- CThe new equilibrium position will be where the new budget line meets the original indifference curve.
- DThe price rise will be represented by a parallel shift inwards of the original budget line.
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Correct answer: A. The income and substitution effects of the price increase will work in opposite directions in the case of a Giffen good.
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