In general,an increase in the price of a good:
A) will cause the substitution effect to be bigger than the income effect.
B) will cause the income effect to be bigger than the substitution effect.
C) will cause both an income and substitution effect.
D) usually will have no effect.

Question

Quizplus · Accepted Answer

An increase in the price of a good will cause both an income and substitution effect. The substitution effect occurs because consumers will switch to a substitute good that has become relatively cheaper. The income effect occurs because the increase in price reduces the consumer's purchasing power, which decreases the quantity demanded of all goods. Therefore, both effects will be present when the price of a good increases.

In General,an Increase in the Price of a Good