When the price of an item increases, buyers tend to purchase less of that item:
A)solely because of the substitution effect.
B)solely because of the income effect.
C)because of both the substitution and the income effects.
D)only if the substitution effect and the income effect do not cancel out each other.

Question

Quizplus · Accepted Answer

When the price of an item increases, both the substitution effect and the income effect come into play. The substitution effect makes buyers switch to substitute goods that are relatively cheaper, while the income effect reduces their purchasing power, making them unable to afford the same quantity of the good. Therefore, both effects work together to decrease the quantity of the item demanded. Thus, the best choice is C, which states that the reason for the decrease in the quantity purchased is due to both the substitution and income effects.

When the Price of an Item Increases, Buyers Tend to Purchase