three haircuts and 10 personal pizzas, showing that Ogden reacted to a higher price of haircuts by cutting back

only on haircuts, while leaving his consumption of pizza unchanged.

The dashed line in the diagram, and point C, are used to separate the substitution effect and the income effect.

To understand their function, start by thinking about the substitution effect with this question: How would

Ogden change his consumption if the relative prices of the two goods changed, but this change in relative

prices did not affect his utility? The slope of the budget constraint is determined by the relative price of the two

goods; thus, the slope of the original budget line is determined by the original relative prices, while the slope of

the new budget line is determined by the new relative prices. With this thought in mind, the dashed line is a

graphical tool inserted in a specific way: It is inserted so that it is parallel with the new budget constraint, so it
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