Question

The – effect means Tommy’s – will shift because he has less purchasing power. As a result, he may choose the regular-size steak instead of the larger "hunter’s portion" he prefers. The – effect means Tommy may spend some of the money he saved by ordering the smaller steak to order a bigger salad.

Answer 1

The correct answer is: income effect; budget line; substitution effect.

Step-by-step explanation:

The change in the price of a product has two effects on the consumption pattern of an individual. The increase in price reduces the purchasing power of the consumer as the consumer will now be able to afford a lesser quantity of that product.

This is known as income effect as the real income of the consumer is changing. This change in real income causes the budget constraint to shift.

Here in the given example, Tommy's real income will change causing his budget line to shift. Tommy will be able to afford regular size steak.

By saving money on a steak if he orders a bigger salad this shows the substitution effect. In case of price change when a consumer prefers a cheaper alternative it is called the substitution effect.