The table below shows the total utility associated with various units of goods X and Y.Table 7.5

-When the price of a good changes, the substitution effect occurs because:
A)the consumers' real income measured in terms of that good changes.
B)the relative price of that good changes compared to other goods in the consumption bundle.
C)the total utility of that good decreases.
D)the marginal utility of that good decreases.
E)consumers have an incentive to substitute irrational behavior for rational behavior.

Question

The table below shows the total utility associated with various units of goods X and Y.Table 7.5
 
-When the price of a good changes, the substitution effect occurs because:
A)the consumers' real income measured in terms of that good changes. 
B)the relative price of that good changes compared to other goods in the consumption bundle. 
C)the total utility of that good decreases. 
D)the marginal utility of that good decreases. 
E)consumers have an incentive to substitute irrational behavior for rational behavior.

Quizplus · Accepted Answer

The substitution effect occurs when the relative price of a good changes compared to other goods in the consumption bundle. This change in price causes consumers to substitute the now relatively cheaper good for other goods in the bundle in order to maximize their utility. The change in relative price leads to a change in the marginal utility per dollar spent on each good, which influences the consumer's decision-making process.

The Table Below Shows the Total Utility Associated with Various