Amy purchases only coffee and croissants.The substitution effect associated with a decrease in the price of a croissant will result in:
A)a decrease in the consumption of croissants and an increase in the consumption of coffee
B)an increase in the consumption of croissants and a decrease in the consumption of coffee
C)only a decrease in the consumption of coffee
D)only an increase in the consumption of coffee

Question

Quizplus · Accepted Answer

The substitution effect occurs when consumers react to a price change by consuming more of a cheaper good and less of a more expensive one. If the price of croissants decreases, consumers will substitute away from coffee (the relatively more expensive good) towards more croissants, leading to an increase in the consumption of croissants and a decrease in the consumption of coffee.

Amy Purchases Only Coffee and Croissants