The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the
A) income effect.
B) normal effect.
C) inferior effect.
D) substitution effect.

Question

Quizplus · Accepted Answer

The change in consumption that results from a price change moving the consumer along a given indifference curve is known as the substitution effect. This effect shows how consumers will switch to the cheaper alternative when the price of a product increases, holding the utility constant. It is important to note that the substitution effect and the income effect (which shows how the change in price affects purchasing power and therefore the quantity demanded) together make up the total price effect. The normal/inferior effect is not relevant to this scenario as they refer to changes in demand for a product due to changes in income.

The Change in Consumption That Results When a Price Change