Asked by Nikos Xydakis on Jun 28, 2024
Verified
A decrease in the price of a good,holding income and the prices of all other goods constant,is associated with:
A) a positive substitution effect since consumers increase their consumption of the good as the marginal utility per dollar of the good increases.
B) a negative substitution effect since consumers decrease their consumption of the good as the marginal utility per dollar spent of the good decreases.
C) the consumer purchasing fewer of all goods in the consumption bundle.
D) a shift inward of the budget line.
Substitution Effect
The shift in buying habits caused by a change in the relative costs of products, prompting consumers to substitute pricier options with more affordable ones.
Price Change
Price change refers to the variation in the cost of a good or service over time, which can be influenced by factors such as supply, demand, and inflation.
Budget Line
An illustration showing every possible mix of two products that can be acquired with a certain amount of money, assuming the prices are constant.
- Acquire knowledge about how changes in pricing, income effects, and substitution effects influence consumer demand.
Verified Answer
LL
Levina LairensiaJul 02, 2024
Final Answer :
A
Explanation :
According to the law of demand, as the price of a good decreases, the quantity demanded of that good increases. Holding income and the prices of other goods constant means that the relative price of the good has decreased, leading to a higher marginal utility per dollar spent on that good compared to other goods. This creates a positive substitution effect, which prompts consumers to increase their consumption of the good.
Learning Objectives
- Acquire knowledge about how changes in pricing, income effects, and substitution effects influence consumer demand.