In the diagram on the right the consumer\'s original budget line is , and the co

Question

In the diagram on the right the consumer's original budget line is , and the consumer buys the amount of good X at point A. Then the price of good X decreases dramatically so that the consumers new budget line shifts to L2. After the price decrease the consumer buys the amount of good X at point C. The substitution effect due to the price change is the movement from point A to point B The income effect due to the price change is the movement from point | | to point | Based on the income effect, good X is | good Good X

Explanation / Answer

To calculate the income effect,the consumer's real income has to be restored.The consumer is again back at L2 and on U2.Consumer is in equilibrium at C.

Income effect-B to C.

Since the income effect is positive,the good is a normal good.

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