What are the two effects of a change in a price that a consumer experiences?
A)the income effect and the budget effect
B)the complement effect and the substitute effect
C)the price effect and the preference effect
D)the income effect and the substitution effect

Question

Quizplus · Accepted Answer

A change in price leads to two effects on a consumer - the income effect and the substitution effect. The income effect refers to the change in the consumer's purchasing power due to the change in price, while the substitution effect refers to the shift in the consumer's preference towards substitute goods due to the change in price. Hence, option D is the correct answer. Options A, B, and C mention incorrect effects of price changes on consumers.

What Are the Two Effects of a Change in a Price