Change in demand due to change in relative price alone is called:
A)Income effect
B)Substitution effect
C)Price effect
D)Ratchet effect

Question

Quizplus · Accepted Answer

The substitution effect occurs when consumers react to a change in the price of a good by substituting it with another good, keeping their utility level constant. This effect isolates the impact of relative price changes on demand, separate from the income effect, which involves changes in consumption patterns due to changes in purchasing power.

Change in Demand Due to Change in Relative Price Alone