Question

Can someone please draw a graph that represent income and substitution effect for a price rise?

Thank you

Answer 1

Initially the budget line is AB where Q0 level of good X is consumed. If price of good X rises, budget line shifts to AQ1 where less units of good X is consumed. Substitution effect influences consumer to consume less of good X and more of other good which is substitute of good X while Income effect induces consumers to purchase less of the goods as it reduces its real power of purchasing goods. Income effect shifts consumer from point O to M while substitution effect induce consumers to shift to the good which is comparatively cheaper. Thus consumer start consuming more of good Y and less of X which shifts consumers from point M to N.

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