Which of the following statements is true about the substitution and income effects of an increase in the price of a good?
A)The net effect of the substitution and income effects results in a decrease in the quantity demanded of the good.
B)Both the substitution and income effects predict that the quantity demanded of the good increases.
C)The substitution effect predicts that the quantity demanded of the good increases, but the income effect predicts that the quantity demanded of the good decreases.
D)The substitution effect predicts that the quantity demanded of the good decreases, but the income effect predicts that the quantity demanded of the good increases.
E)Neither the substitution effect nor the income effect provides any prediction about changes in the quantity demanded of the good.

Question

Quizplus · Accepted Answer

The substitution effect occurs when consumers switch from a good that has become relatively more expensive to a less expensive alternative, leading to a decrease in the quantity demanded of the more expensive good. The income effect happens because the price increase effectively reduces consumers' purchasing power, also typically leading to a decrease in the quantity demanded of the more expensive good. Together, these effects generally result in a net decrease in the quantity demanded of the good whose price has increased.

Which of the Following Statements Is True About the Substitution