The substitution effect of an increase in the price of peaches is
A) the change in the quantity demanded that results from a change in the price of peaches making peaches more expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.
B) the change in the demand for nectarines (a substitute good) that results when peaches become more expensive relative to nectarines, holding constant the effect of the price change on consumer purchasing power.
C) the change in the quantity demanded of peaches that results from the effect of the change in the price of peaches on the consumer's purchasing power.
D) the change in the demand for peaches that results when the price of peaches increases.

Question

Quizplus · Accepted Answer

The substitution effect refers to the change in the quantity demanded of a good that results from a change in its relative price, holding constant the effect of the price change on consumer purchasing power. In this case, an increase in the price of peaches makes peaches more expensive relative to other goods, leading consumers to substitute away from peaches to other goods, resulting in a decrease in the quantity demanded of peaches.

The Substitution Effect of an Increase in the Price of Peaches