Following an income-compensated price change, you decide to increase the quantity of pizza purchased each month when the price decreases and therefore purchase fewer hamburgers.This is an indication of the:
A) output effect.
B) income effect.
C) marginal effect.
D) substitution effect.

Question

Quizplus · Accepted Answer

This is an indication of the substitution effect, which occurs when consumers switch to purchasing more of a lower-priced product and less of a higher-priced product. The income effect, on the other hand, occurs when the change in price affects the consumer's purchasing power and their ability to buy both products. The output effect and marginal effect are not relevant to this scenario.

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