The substitution effect shows that
A) if the price of a good increases, consumers buy more of that good and less of all others.
B) if the price of a good falls relative to all other goods, consumers buy less of that good and more of all others.
C) if the price of a good falls, consumers buy less of all goods.
D) if the price of a good rises, consumers buy less of that good and more of others.

Question

Quizplus · Accepted Answer

The substitution effect shows that if the price of a good increases, consumers will substitute it for a cheaper alternative (i.e. buy less of that good and more of others). This is why the answer choice D is correct - if the price of a good rises, consumers will buy less of that good and more of others. Choice A is incorrect because consumers would not buy more of the good that increased in price. Choice B is incorrect because consumers would not buy more of all other goods if the price of one good falls relative to all others. Choice C is incorrect because consumers would not buy less of all goods if the price of one good falls.

The Substitution Effect Shows That