A consumer buys two goods, X and Y. When the price of good X decreases, this encourages a buyer to buy more of good X and less of good Y, which is called the:
A) precautionary principle.
B) substitution effect.
C) income effect.
D) marginal utility principle.

Question

Quizplus · Accepted Answer

The substitution effect occurs when a consumer reacts to a price decrease for one good by consuming more of that good and less of a substitute good, in this case, buying more of good X and less of good Y due to the price decrease of good X.

A Consumer Buys Two Goods, X and Y