A decrease in the price of a good,holding income and the prices of all other goods constant,is associated with:
A)a positive substitution effect since consumers increase their consumption of the good as the marginal utility per dollar of the good increases.
B)a negative substitution effect since consumers decrease their consumption of the good as the marginal utility per dollar spent of the good decreases.
C)the consumer purchasing fewer of all goods in the consumption bundle.
D)a shift inward of the budget line.

Question

Quizplus · Accepted Answer

According to the law of demand, as the price of a good decreases, the quantity demanded of that good increases. Holding income and the prices of other goods constant means that the relative price of the good has decreased, leading to a higher marginal utility per dollar spent on that good compared to other goods. This creates a positive substitution effect, which prompts consumers to increase their consumption of the good.

A Decrease in the Price of a Good,holding Income and the Prices