Following an income-compensated price change, you decide to decrease the quantity of ice cream purchased each month when the price increases and purchase more frozen yogurt instead.This is an indication of the:
A) substitution effect.
B) utility effect.
C) income effect.
D) consumption effect.

Question

Quizplus · Accepted Answer

The fact that you are choosing to buy more frozen yogurt and less ice cream indicates that the price change caused you to substitute one good for another. This is known as the substitution effect, as opposed to the income effect, which would refer to a change in your purchasing power due to the price change. The utility effect and consumption effect are not relevant to this scenario.

Following an Income-Compensated Price Change, You Decide to Decrease the Quantity