The substitution effect 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 is correct.

Question

Quizplus · Accepted Answer

The substitution effect isolates the change in the consumption of a good caused by the change in the relative prices of two goods. It shows how a change in price affects the relative attractiveness of different goods, leading consumers to substitute the relatively cheaper one for the relatively more expensive one. The other options (lower "real" income and change in consumer preferences) may also influence the consumption of a good, but they are not specifically related to the substitution effect.

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