The substitution effect
A) is always larger than the price effect.
B) is always smaller than the income effect.
C) always decreases purchases of a good as the price of a good rises.
D) increases purchases of the good as the price rises if the good is a normal good.

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in consumption patterns due to a change in the relative prices of goods, holding the consumer's utility constant. When the price of a good rises, consumers will tend to buy less of that good and more of other goods, substituting away from the more expensive good, hence decreasing purchases of the good whose price has risen.

The Substitution Effect