Asked by Lydia Silva on May 09, 2024
Verified
When the price of a product falls for a good, the
A) income and substitution effects will encourage consumers to purchase more of the product.
B) income and substitution effects will encourage consumers to purchase less of the product.
C) substitution effect will encourage consumers to purchase less of the product, and the income effect will encourage them to purchase more.
D) substitution effect will encourage consumers to purchase more of the product, and the income effect will encourage them to purchase less.
Income Effect
The income effect refers to the change in an individual's or economy's income and how that change will impact the quantity demanded of a good or service.
Substitution Effect
The change in consumption patterns due to a change in relative prices, leading consumers to substitute one good for another more or less expensive.
- Investigate the consequences of price alterations on the demand quantity by analyzing the income and substitution effects.
Verified Answer
LW
Lyndsey WhaleyMay 12, 2024
Final Answer :
A
Explanation :
When the price of a product falls, the substitution effect makes the product more attractive compared to alternatives, leading consumers to substitute towards it. The income effect makes consumers feel effectively wealthier since they can now buy the same amount of the product for less money, potentially leading them to buy more. Both effects encourage increased consumption of the product.
Learning Objectives
- Investigate the consequences of price alterations on the demand quantity by analyzing the income and substitution effects.