The change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution is called
A)the income effect.
B)the substitution effect.
C)the Giffen good effect.
D)the inferior good effect.

Question

Quizplus · Accepted Answer

The change in consumption resulting from a price change that moves the consumer along a given indifference curve to a point with a new marginal rate of substitution is called the substitution effect. This effect shows how consumers substitute cheaper goods for more expensive ones in response to a change in relative prices while still remaining on the same indifference curve. The income effect, by contrast, refers to the change in consumption resulting from a price change that causes a shift in the consumer's budget constraint, affecting the quantity demanded of all goods. Giffen goods and inferior goods refer to specific types of goods that may defy the law of demand by having upward sloping demand curves when the price increases.

The Change in Consumption That Results When a Price Change