The substitution affect isolates the change in the consumption of a good caused by:
A)the lower "real" income.
B)the change in the relative prices of two goods.
C)the change in consumer preferences.
D)none of the statements associated with this question are correct.

Question

Quizplus · Accepted Answer

The substitution effect shows the change in the consumption of a good that results from a change in the relative prices of two goods. It isolates the effect of a price change by assuming that the consumer's real income remains constant. Therefore, option A is incorrect. Option C refers to the income effect, not the substitution effect. Option D is a false statement.

The Substitution Affect Isolates the Change in the Consumption of a Good