In general, a change in the price of a good:
A)causes a substitution effect only.
B)causes an income effect only.
C)causes both an income and substitution effect.
D)has no effect on the budget constraint.

Question

Quizplus · Accepted Answer

A change in the price of a good typically causes both an income effect and a substitution effect. The substitution effect occurs because the relative price of goods changes, making one good relatively cheaper than others, leading consumers to substitute towards the cheaper good. The income effect occurs because the change in price affects the consumer's purchasing power, effectively making them feel richer or poorer, which in turn affects their buying choices.

In General, a Change in the Price of a Good