The substitution effect of a price change is described by which of the following statements?
A) When the price of a good falls, consumers have more real income with the same nominal income and will now buy more of the good.
B) When the price of a good falls, consumers will now substitute this lower priced good for relatively higher priced goods.
C) The substitution effect is the relative change in the amount of a good consumed when the price of another good changes.
D) The substitution effect shows how a change in income will affect the quantity of a good purchased.

Question

Quizplus · Accepted Answer

The substitution effect is the change in quantity demanded of a good due to a change in its relative price compared to other goods. When the price of a good falls, consumers are likely to substitute this lower-priced good for relatively higher-priced goods, leading to an increase in the quantity demanded of the former. Therefore, option B is the correct description of the substitution effect. Options A and D are referring to the income effect, which is another effect that explains the change in the quantity demanded of a good due to a change in income, rather than a change in price. Option C is an incomplete or incorrect statement, as it mentions a change in quantity consumed due to a change in the price of another good, without specifying how the two goods are related.

The Substitution Effect of a Price Change Is Described by Which