The substitution effect of a price decrease:

Question

Quizplus · Accepted Answer

The substitution effect of a price decrease is a movement along the indifference curve as the consumer will now consume more of the lower priced product and less of the higher priced product. This is because the opportunity cost of consuming the lower priced product has decreased, making it relatively more attractive to consume. Therefore, the substitution effect only leads to a change in the quantity demanded of the goods and not a shift in the indifference curve. Hence, option C is the correct answer.

Option A and B are incorrect because although the price decrease may lead to an increase in well-being and real income in some cases, it is not a direct consequence of the substitution effect. Option D is incorrect because the substitution effect does not result in a shift in the indifference curve, as it only leads to a change in the quantity demanded of the goods.

The Substitution Effect of a Price Decrease