Which effect of a price change moves the consumer along the same indifference curve to a point with a new marginal rate of substitution?
A)Budget effect
B)Preference effect
C)Substitution effect
D)Income effect

Question

Quizplus · Accepted Answer

The substitution effect occurs when a change in price causes a consumer to switch from one good to another along the same indifference curve. As the consumer moves along the indifference curve to a new bundle of goods with a new marginal rate of substitution, the substitution effect is taking place. The budget effect concerns changes in the consumer's purchasing power due to the change in price, while the income effect reflects changes in the consumer's income due to the change in price. The preference effect is not a recognized economic concept.

Which Effect of a Price Change Moves the Consumer Along