The substitution effect
A)reduces the quantity demanded of a good when its price increases.
B)is equal to the income effect for a normal good.
C)is always greater than the income effect.
D)is always smaller than the income effect.

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in quantity demanded of a good due to a change in its price relative to the prices of other goods. Specifically, when the price of a good increases, consumers will tend to substitute it with cheaper alternatives, which reduces the quantity demanded of the higher-priced good. Therefore, (A) is the correct choice. The income effect, on the other hand, refers to the change in quantity demanded of a good due to a change in consumers' purchasing power resulting from a change in their income. (B) is incorrect because the income effect and substitution effect are different concepts that can work in opposite directions. (C) and (D) are incorrect because the relative size of the substitution and income effects depends on the specific circumstances and cannot be generalized.

The Substitution Effect