The increase in quantity demanded due to a price reduction is a result of the _______ and the ________.
A) budget effect; income effect
B) income effect; demand effect
C) substitution effect; income effect
D) demand effect; budget effect

Question

Quizplus · Accepted Answer

A decrease in price causes consumers to switch from relatively expensive goods to relatively cheaper ones, which is called the substitution effect. As the price falls, the increase in purchasing power of a given amount of money is referred to as the income effect. As a result, the combination of these two effects is that when the price falls, the quantity demanded increases. Therefore, the correct answer is (C) substitution effect; income effect.

The Increase in Quantity Demanded Due to a Price Reduction