If the price of a good decreases, the substitution effect
A) can increase or decrease the quantity of the good demanded.
B) shows the increase in the quantity of the good demanded, holding income constant.
C) shows the increase in the quantity of the good demanded, holding utility constant.
D) must be greater than the income effect.
E) is positive since the quantity of the good increases.

Question

Quizplus · Accepted Answer

The substitution effect occurs when a price change causes a consumer to substitute the cheaper good for more expensive ones, holding utility constant. This effect isolates the change in quantity demanded due to the relative price change, assuming the consumer's overall satisfaction (utility) remains the same.

If the Price of a Good Decreases, the Substitution Effect