The substitution effect of a price change leads consumers to ________ their demand for goods whose prices have risen.The income effect leads consumers to buy less of all ________ goods whose prices have risen.
A)reduce; normal
B)increase; inferior
C)increase; normal
D)reduce; Giffen
E)reduce; complement

Question

Quizplus · Accepted Answer

The substitution effect leads consumers to reduce their demand for goods whose prices have risen because they will switch to cheaper substitutes. On the other hand, the income effect leads consumers to buy less of all normal goods whose prices have risen because their purchasing power has decreased. Inferior goods and Giffen goods have unique income and substitution effects, respectively, but these are not mentioned in the question. Complementary goods are not directly related to price changes, but rather to the demand for related goods.

The Substitution Effect of a Price Change Leads Consumers to ________