Suppose a consumer is in equilibrium at point A in the diagram below, where the price of good X is \$5. If the price of good X decreases to \$3, which of the following is most likely to occur?

• A. The consumer will move to a higher indifference curve, increasing their consumption of good X.
• B. The consumer will reduce their consumption of good X and move to a lower indifference curve.
• C. The consumer's equilibrium will remain unchanged at point A.
• D. The consumer will consume less of both goods due to the price decrease.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of consumer equilibrium, which occurs where the consumer maximizes their utility given their budget constraint. This is typically where the budget line is tangent to an indifference curve.
2. Step 2: Recognize that a decrease in the price of good X effectively rotates the budget line outward, allowing the consumer to afford more of good X for the same income.
3. Step 3: Analyze how the consumer responds to this price change by moving to a new equilibrium point where the new budget line is tangent to a higher indifference curve, indicating higher utility.
4. Step 4: Apply the principle that when the price of a good decreases, the consumer will generally increase consumption of that good (substitution effect) and may also increase overall consumption due to increased real income (income effect).
5. Step 5: Conclude that the consumer will move to a higher indifference curve and increase consumption of good X, reflecting an improvement in their overall satisfaction.