Question

There are many options available to consumers when it comes to breakfast cereals. So, if Kellogg's significantly increases the price of Rice Krispies, consumers are more apt to buy alternate cereals instead. This illustrates which concept?1) cross-price elasticity
2) the income effect
3) the target return effect
4) the substitution effect
5) the break-even point

Answer 1

Answer:

4) the substitution effect

Explanation:

When a product's change in price (increase) directly influences the consumers to switch to lower-cost alternatives, it is called the substitution effect.

Usually, it is applicable for similar kinds of FMCG goods. Of course, personal spending power and consumer habits are of great importance too, but the substitution effect best describes what happens with the consumer choice when the price of a particular good increases.

The substitution effect describes situations when the product's price increases, but the spending power remains on the same level. If the change in spending power was the input for consumer choice, than it would be the income effect.