Which of the following best describes the substitution effect caused by a price increase?
A) A change in consumption due to the fact that you will not buy goods whose marginal value is below the new price.
B) A change in consumption due to the fact that you cannot afford your original market basket.
C) A smaller percentage change in quantity than in price.
D) A larger percentage change in quantity than in price.

Question

Quizplus · Accepted Answer

The substitution effect occurs when a consumer switches to a cheaper alternative due to a price increase. Option A best describes this concept because it states that a consumer will not buy goods whose marginal value is below the new price, indicating a shift towards cheaper alternatives. Option B is incorrect because it refers to the income effect, where a consumer's purchasing power decreases due to a price increase. Options C and D refer to the price elasticity of demand, which is not related to the substitution effect.

Which of the Following Best Describes the Substitution Effect Caused