Which of the following descriptions best depicts the substitution effect?
A)the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant
B)the change in consumption resulting from a change in the consumer's income, holding the consumer's level of satisfaction constant
C)the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant
D)the change in consumption resulting from a change in the price of one good, allowing the consumer's level of satisfaction to change

Question

Quizplus · Accepted Answer

The substitution effect is when a consumer changes their consumption of a good due to a change in its price while maintaining the same level of satisfaction. Thus, option C - "the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant" - best depicts the substitution effect. Option A refers to the income effect, which is the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant. Option B is not a valid description of any economic concept. Option D describes a combination of the income and substitution effects, but it does not solely depict the substitution effect.

Which of the Following Descriptions Best Depicts the Substitution Effect