A change in the price of a good has
A)an income effect only.
B)a substitution effect only.
C)a substitution effect and an income effect.
D)an income effect that exceeds the substitution effect.
E)a substitution effect that exceeds the income effect.

Question

Quizplus · Accepted Answer

A change in price of a good has both a substitution effect and an income effect. The substitution effect occurs because when the price of a good goes up, consumers tend to substitute it with a similar and cheaper good. The income effect occurs because the change in price affects the purchasing power of consumers' income, and therefore can affect the quantity demanded of the good. Therefore, both effects occur simultaneously.

A Change in the Price of a Good Has