The substitution effect from a rise in the price of pizza
A) leads to a movement along the fixed budget line, due to a change in relative prices.
B) increases the quantity demanded of pizza.
C) decreases the quantity demanded of pizza.
D) Both answers A and B are correct.

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in consumption patterns that occur when the price of one good changes relative to the price of another. In this case, a rise in the price of pizza would lead consumers to substitute away from pizza towards other goods that have become relatively cheaper. As a result, the quantity demanded of pizza would decrease. This would be represented by a movement along the fixed budget line as consumers adjust their consumption patterns to reflect the new relative prices. Therefore, only choice C is correct. Choice A is incorrect because it only describes the movement along the budget line and does not refer to the actual effect on pizza consumption. Choice B is incorrect because the substitution effect would actually lead to a decrease, not an increase, in the quantity demanded of pizza.

The Substitution Effect from a Rise in the Price of Pizza