When a price changes there are two effects: the:
A) real-income effect and the consumer optimum effect.
B) substitution effect and the marginal utility effect.
C) real-income effect and the substitution effect.
D) marginal utility effect and the substitution effect.
E) consumer optimum effect and the substitution effect.

Question

Quizplus · Accepted Answer

When a price changes, there are two effects: the real-income effect and the substitution effect. The real-income effect occurs because the change in price affects the consumer's purchasing power, or real-income. The substitution effect occurs because the change in price alters the relative attractiveness of different goods or services, leading consumers to substitute one good or service for another. The other choices are not accurate representations of the effects of price changes.

When a Price Changes There Are Two Effects: The