The tendency of people to substitute cheaper commodities for more expensive commodities is the
A) law of diminishing marginal utility.
B) real-income effect.
C) substitution effect.
D) price income effect.

Question

Quizplus · Accepted Answer

The substitution effect is the tendency of consumers to substitute a cheaper good for a more expensive one when the price of the more expensive good rises. This is a result of consumers seeking to maintain the same level of utility while reducing their costs. The law of diminishing marginal utility refers to the idea that the satisfaction gained from consuming additional units of a good decreases as consumption increases. The real-income effect refers to the impact of changes in prices on the purchasing power of an individual's income. The price income effect is the combined impact of changes in price and income on the quantity demanded of a good.

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