JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a key ingredient used to produce cola, falls. According to the substitution effect, which of the following is most likely to occur?
A) JoAnn will purchase less cola and more sparkling water.
B) JoAnn will purchase more cola and less sparkling water.
C) JoAnn will purchase more of all goods due to her higher real income.
D) JoAnn's demand curve will decrease (shift in), causing her to purchase less cola.

Question

Quizplus · Accepted Answer

The substitution effect suggests that when the price of cola decreases (due to the fall in sugar prices), cola becomes cheaper relative to sparkling water, leading JoAnn to substitute cola for sparkling water, hence buying more cola and less sparkling water.

JoAnn Considers Cola and Plain Sparkling Water to Be Good