Assume the price of Nikes decreases. As a result, consumers increase the quantity of Nikes purchased each year and purchase fewer Reeboks. This is an example of the:
A) substitution effect.
B) income effect.
C) utility effect.
D) consumption effect.

Question

Quizplus · Accepted Answer

This is an example of the substitution effect, as consumers are substituting Nikes for Reeboks due to the price decrease. The income effect refers to changes in purchasing power due to changes in income, the utility effect refers to changes in satisfaction or usefulness, and the consumption effect is not a commonly used economic term.

Assume the Price of Nikes Decreases