The substitution effect associated with a change in price describes
A) the change in the level of consumption as a result of the consumer's change in utility, holding price constant.
B) the change in the level of consumption, holding utility constant.
C) the change in relative purchasing power.
D) both a) and c) are correct.

Question

Quizplus · Accepted Answer

The substitution effect associated with a change in price describes the change in the level of consumption, holding utility constant. Specifically, it refers to the change in the quantity demanded of a good that results from a change in its price, assuming that the consumer's level of satisfaction (or utility) from consuming the good remains constant. The substitution effect arises because, as the price of a good increases, consumers will typically switch to substitute goods that have become relatively cheaper.

The Substitution Effect Associated with a Change in Price Describes