Refer to Figure 4-6. What area represents the deadweight loss at ...

[Capo]

Refer to Figure 4-6. What area represents the deadweight loss at the equilibrium price of P1?
 
  A) G + H B) C + E
  C) C + E + H D) There is no deadweight loss at the price of P1.

Question 2

Into what two effects can we divide the effect of a price change?
 
  What will be an ideal response?

[parshano]

Answer to Question 1

D

Answer to Question 2

A price change can be divided into a substitution effect and an income effect. The substitution effect is the effect of a change in price on the quantity bought when the consumer remains indifferent between the original situation and the new situation. The income effect is the effect of a change in income sufficient to get the consumer to the highest indifference curve that is affordable on the new budget line reflecting the price change.