Which of the following statements best describes the substitution effect?
A)The change in consumption resulting from a change in the consumer's income holding the prices of the goods constant.
B)The change in consumption resulting from a change in the consumer's income holding the consumer's level of satisfaction constant.
C)The change in consumption resulting from a change in the price of one good holding the consumer's level of satisfaction constant.
D)The change in consumption resulting from a change in the price of one good allowing the consumer's level of satisfaction to change.

Question

Quizplus · Accepted Answer

The substitution effect is the change in consumption resulting from a change in the price of one good holding the consumer's level of satisfaction constant. This effect occurs because consumers will switch to the substitute good that has become relatively cheaper due to the price change. This change in relative prices leads to a change in the ratio of marginal utilities of the two goods, which in turn leads to a change in the quantity demanded of each good.

Which of the Following Statements Best Describes the Substitution Effect