Consider the following diagram r 2 must be (none/smaller/greater/income/substitu

Question

Consider the following diagram

r2 must be (none/smaller/greater/income/substitution/saver/borrower) than r1.
At r1, the consumer is a  (none/smaller/greater/income/substitution/saver/borrower).
Going from D to B is the  (none/smaller/greater/income/substitution/saver/borrower) effect, while going from A to D is the  (none/smaller/greater/income/substitution/saver/borrower) effect.
In this example, the income effect on c' is  (none/smaller/greater/income/substitution/saver/borrower) than the substitution effect.

Explanation / Answer

1. The correct answer is: greater

Reason: as the budget line gets steeper, r2 must be greater than r1.

2. The correct answer is: borrower.

Reason: As at r1, the present consumption at point A is much greater than the endowment at point E

3. The correct answer is: income

Reason: As this is a movement from one budget line to another budget line along two different indifference curves.

4. The correct answer is: substitution

Reason: As this is movement from one budget line to another along the same indifference curve.

5. The correct answer is: greater

Reason: As ultimately at r2, the present consumption i.e. c' reduces.

Thanks!

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