Question

Replacing a good with a similar good because of a change in prices is an example of the:

substitution effect

supply and demand

price rationalizing


none of the above

Answer 1

Substitution effect. When the prices go up consumers tend to change the demand of the product. There are two effects involved in this process: price effect and substitution effect. Substitution effect is when consumers change their preferences to a similar product but with lower price.