People change their consumption choices in response to changes in price because of
A)the income effect and the substitution effect
B)the substitution effect
C)the utility effect
D)the income effect
E)both the income effect and the utility effect

Question

Quizplus · Accepted Answer

People change their consumption choices in response to changes in price because of both the income effect and the substitution effect. The substitution effect shows how consumers will switch to a similar, less expensive product if the price of the product they originally wanted goes up. The income effect shows how a price increase reduces the overall purchasing power of consumers, causing them to buy less of all goods or services. Together, these effects shape consumers' choices and behaviors in response to changes in price.

People Change Their Consumption Choices in Response to Changes in Price