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2 marksTheory of Consumer Demand

CAPE Economics Unit 1 · 2012 · Paper 2 · Question 1(a)(i)a)

A consumer purchases Good X and Good Y, starting at equilibrium A. When the price of Good X falls, the consumer transitions to equilibrium B.

Define the terms 'indifference curve' and 'budget line'.

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Other parts of this question

  1. 1(a)(i)b)Draw a diagram showing an indifference curve and a budget line, and use it to explain consumer equilibrium.[8 marks]
  2. 1(a)(ii)Using the diagram from (a)(i)b), explain how a decrease in the price of Good X shifts the consumer to equilibrium B.[5 marks]
  3. 1(b)(i)a)Explain what is meant by the 'substitution effect'.[2 marks]
  4. 1(b)(i)b)Explain what is meant by the 'income effect'.[2 marks]
  5. 1(b)(ii)With the aid of a diagram, explain the income and substitution effects using either the Hicksian approach or the Slutskian approach.[6 marks]

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