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?

A. the income effectB. the substitution effectC. the break-even pointD. the target return effectE. cross-price elasticity

Answer 1

Answer: B - the substitution effect

Explanation: The substitution effect of a price change on a commodity is the change in demand for that particular product due to an increase in its price to a close substitute product with a cheaper price.

In essence when a product that has close substitute in the market experience a change in its price, the resultant effect is a change in the demand for that product as consumers will go for the close substitute with a cheaper price.