Anthony has set aside $120 each month for his favorite activities-buying records and going to concerts. The price of a record is $10, and the price of a concert ticket is $30. He currently consumes three records and three concerts each month. If the price of a concert increases to $40, the substitution effect predicts that Anthony will consume:
A)more records and concerts.
B)fewer records and concerts.
C)more records and fewer concerts.
D)fewer records and more concerts.

Question

Quizplus · Accepted Answer

The substitution effect occurs when consumers react to an increase in a good's price by consuming less of that good and more of a substitute good. In this case, as the price of concerts increases, Anthony is predicted to substitute away from concerts (which have become more expensive) and consume more records (which are relatively cheaper), leading to more records and fewer concerts being consumed.

Anthony Has Set Aside $120 Each Month for His Favorite