The reason the substitution effect works to encourage a consumer to buy less of a product when its price increases is:

A) the real income of the consumer has been increased.

B) the real income of the consumer has been decreased.

C) the product is now relatively more expensive than it was before.

D) other products are now relatively more expensive than they were before

Question

Business

Paris Dawson

20 October, 03:54

The reason the substitution effect works to encourage a consumer to buy less of a product when its price increases is:

A) the real income of the consumer has been increased.

B) the real income of the consumer has been decreased.

C) the product is now relatively more expensive than it was before.

D) other products are now relatively more expensive than they were before

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Answers (1)

Know the Answer?

Denzel Graham · Answer 1

The correct answer is the option C: the product is now relatively more expensive than it was before.

Explanation:

To begin with, the substitution effect is the term that, in economics, refers to the situation where a products or services increase or decrease its value in comparison with other and therefore it causes a substitution from the consumer regarding that change in the price.

Secondly, in the case where a product increases its price the substitution effect will cause that the consumer decides to purchase other products due to the fact that the first product is now relatively more expensive than it was before and therefore a substitution of the good takes place.