The Diagram Below Shows the Demand and Supply Curves in a Perfectly

question 31

Multiple Choice

The diagram below shows the demand and supply curves in a perfectly competitive market. FIGURE 12-5
-Refer to Figure 12-5.Allocative efficiency occurs

• A)at output level Q₃.
• B)at output level Q₁.
• C)at price P₁ and output Q₃.
• D)at price P₂ and output Q₂.
• E)where the areas 1,2,3,and 4 are maximized.

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Definitions:

Substitution Effect

The substitution effect occurs when consumers replace more expensive items with less costly alternatives.

Income Effect

A change in the quantity demanded of a good or service as a result of a change in real income (purchasing power).

Inferior Good

A type of good for which demand declines as the income of individuals or the economy increases, opposite to normal goods.

Substitution Effect

The change in consumption patterns due to a change in the relative prices of goods, leading consumers to substitute a cheaper good for a more expensive one.