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4Indifference Curves Budget LinesHard1 mark

A consumer spends all of their income on two goods, one of which is a normal good and the other an inferior good. The position of the consumer’s budget line is initially at

B_{1}

and utility is maximised at point X on indifference curve

I_{1}

a budget-line and indifference-curve diagram with the inferior good on the horizontal axis and the normal good on the vertical axis. Two solid budget lines pivot from the same point on the vertical axis: the steeper B$_{1}$ and the flatter B$_{2}$, which meets the horizontal axis further out; a dotted budget line B$_{3}$, parallel to B$_{2}$, has a lower vertical intercept between the two. Two convex indifference curves are drawn close together, I$_{1}$ nearer the origin and I$_{2}$ further out; point X marks where B$_{1}$ is tangent to I$_{1}$. Three dashed vertical guide lines drop from the horizontal axis at S, T and U, in that order out from the origin, marking the quantities of the inferior good where the budget lines and indifference curves meet near X.

What are the income and substitution effects of a fall in the price of the inferior good?

	income effect	substitution effect
A	fall in quantity from U to T	rise in quantity from S to U
B	rise in quantity from S to T	rise in quantity from T to U
C	rise in quantity from S to U	fall in quantity from U to T
D	rise in quantity from T to U	rise in quantity from S to U

May/June 2026 Paper 31

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