On the graph below, the consumer begins at L1. The relative prices change to L2. Complete the table and the sentence below. (Hint: The dashed line is a reference line to show us the income effect. Point B shows only the income effect. The change from A to B is the income effect. The change from B to C is the substitution effect.) 1. Will consumption of Grenades increase or decrease due to the substitution effect? What is the quantity change in grenades due to substitution effect? 2. Will consumption of Porcupines increase or decrease due to the substitution effect? What is the quantity change in porcupines due to substitution effect? 3. Will consumption of Porcupines increase or decrease due to the income effect? What is the quantity change in porcupines due to the income effect?

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Equilibrium Price and Quantity

Equilibrium refers to a state of balance that comes about because there is equality in all forces.