Alternative Way of Analyzing a Price Change

One can also analyze the income and substitution effects by first considering the income change necessary to move the consumer to the new utility level at the initial prices. This constitutes the income effect. The movement along the new indifference curve from the intermediate point to the new equilibrium as the slope of the price line changes is then the substitution effect. See if you can identify the “intermediate” point on the lower indifference curve by shifting the budget line (Hint: q1 and q2 both fall.).