When Pepsi becomes more expensive relative to other beverages, people will purchase less Pepsi. This observation is known as the:
A) diamond-water paradox.
B) law of diminishing marginal utility.
C) substitution effect.
D) income effect.

Question

Quizplus · Accepted Answer

The observation described in the question is known as the substitution effect. When the price of one good increases relative to other goods, consumers will substitute the relatively more expensive good for cheaper alternatives. In this case, when Pepsi becomes more expensive, consumers may choose to purchase other beverages instead.

When Pepsi Becomes More Expensive Relative to Other Beverages, People