The price effect is equal to the
A) substitution effect minus the income effect.
B) substitution effect plus the income effect.
C) substitution effect.
D) marginal rate of substitution minus relative prices.

Question

Quizplus · Accepted Answer

The price effect is the total change in quantity demanded resulting from a change in the price of a good, and it can be broken down into the substitution effect (the change in quantity demanded due to a change in relative prices, holding utility constant) and the income effect (the change in quantity demanded due to a change in purchasing power, holding relative prices constant). Therefore, the price effect is equal to the substitution effect plus the income effect.

The Price Effect Is Equal to the