When the price of a good changes, ______ influence(s) the change in consumption.
A) the income effect alone
B) the substitution effect alone
C) both the income effect and the substitution effect
D) neither the income effect nor the substitution effect

Question

Quizplus · Accepted Answer

A change in the price of a good results in two effects on consumption - income effect and substitution effect. The income effect occurs because a change in price affects the consumer's purchasing power. The substitution effect occurs because consumers switch to substitute goods that become relatively cheaper after a price change. So, both income effect and substitution effect influence the change in consumption when the price of a good changes.

When the Price of a Good Changes, ______ Influence(s) the Change