The substitution effect isolates the change in the consumption of a good caused by:
A) the lower "real" income.
B) the change in consumer preferences.
C) the change in the market rate of substitution.
D) None of the preceding statements is correct.

Question

Quizplus · Accepted Answer

The substitution effect isolates the change in the consumption of a good caused by a change in the relative price of goods, which alters the market rate of substitution between them, making consumers substitute away from the relatively more expensive good towards the relatively cheaper one.

The Substitution Effect Isolates the Change in the Consumption of a Good