What is the primary difference between the substitution and the income effect of a price change?
A) The substitution effect holds income constant and the income effect holds utility constant.
B) The substitution effect is always positive and the income effect is always negative.
C) The substitution effect holds utility constant and the income effect holds prices constant.
D) The substitution effect is always negative and the income effect is always positive.

Question

Quizplus · Accepted Answer

The substitution effect holds utility constant by adjusting consumption to maintain the same level of satisfaction when prices change, while the income effect holds prices constant to show how changes in purchasing power affect consumption.

What Is the Primary Difference Between the Substitution and the Income