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

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 Raisin