The substitution effect of an increase in the price of Cornflakes refers to
A) the decrease in the demand for Cornflakes when its price rises.
B) the result that consumers will now switch to a substitute good such as Cheerios, and the demand curve for Cornflakes shifts to the left.
C) the fact that the higher price of Cornflakes lowers consumers' purchasing power, holding money income constant.
D) the fact that the higher price of Cornflakes relative to its substitutes, such as Cheerios, causes consumers to buy less Cornflakes.

Question

Quizplus · Accepted Answer

The substitution effect occurs when a price increase makes a good relatively more expensive compared to its substitutes, leading consumers to buy less of the more expensive good and more of the substitute.

The Substitution Effect of an Increase in the Price of Cornflakes