Final answer:
When demand is elastic, the substitution effect outweighs the income effect, leading to an increase in total revenue following a price decrease. The term 'Elastic Demand' means consumers are very responsive to price changes.
Step-by-step explanation:
When demand is elastic, the substitution effect is greater than the income effect, and a fall in price increases total revenue. The correct answer to the student's question is: a) Substitution, income, increases. When we refer to the term Elastic Demand (Ed), it implies that consumers are highly responsive to changes in price. In the context of elastic demand, the substitution effect, which occurs when consumers opt for a comparatively cheaper product over other more expensive alternatives, dominates the income effect, which is the change in consumption resulting from a change in real income.
Thus, when the price of a product decreases, consumers tend to substitute this now cheaper product for others, which leads to an increase in the quantity demanded. This increase in quantity demanded offsets the fall in price, leading to an increase in total revenue.