The substitution effect always involves a change in consumption in the _______ direction of the ________ change.
A) same; budget
B) same; price
C) opposite; price
D) opposite; budget

Question

Quizplus · Accepted Answer

The substitution effect occurs when the price of a good changes, and consumers switch to a substitute good that has become relatively cheaper. This leads to a decrease in the consumption of the good that has become relatively more expensive. Since the price and consumption move in opposite directions, the substitution effect always involves a change in consumption in the opposite direction of the price change. Therefore, the correct answer is C, opposite direction of the price change.

The Substitution Effect Always Involves a Change in Consumption in the _______