Question

The substitution effect is the change in consumption due to: A. a change in utility. B. a change in income. C. a change in the availability of complements. D. a change in relative prices.

Answer 1

Answer:

Option (D) is correct.

Explanation:

There are two kinds of effect:

(1) Substitution effect : It is related to the relative price changes.

(2) Income effect: It is related to the change in purchasing power.

The substitution effect refers to the change in the consumption of a good with any change in the relative price of the good. If there in an increase in the price of one good then as a result the demand for that good decreases and the demand for other substitute good increases because of the lower price.