The substitution effect
A)always dominates the income effect.
B)is always dominated by the income effect.
C)results in an increase in the quantity of the good consumed when the price rises.
D)results in a decrease in the quantity of the good consumed when the price falls.
E)is greater than the price effect.

Question

Quizplus · Accepted Answer

The substitution effect is the change in consumption patterns that occurs when consumers substitute a relatively cheaper good for a relatively more expensive one. It results in a decrease in the quantity of the good consumed when the price of that good rises, and an increase in the quantity consumed when the price falls. The income effect, on the other hand, occurs when a change in price affects consumer purchasing power. It can either increase or decrease the quantity of a good consumed depending on whether the good is a normal or inferior good. While the substitution effect can sometimes be dominated by the income effect, it is not always the case. Therefore, choice (B) is incorrect. Choice (E) is also incorrect as the substitution effect is not comparable to the price effect since they refer to different concepts. Choice (A) is incorrect as the relative dominance of the substitution and income effects depends on various factors, such as the substitution elasticity and the income elasticity of demand.

The Substitution Effect