Question

Match the scenarios with the economic concepts they illustrate.

a. positive externality
b. substitution effect
c. negative externality
d. income effect

1. The rising price of gold causes people to buy silver jewelry instead.
2. When the price of chicken increases, families reduce their chicken intake substantially.
3. A new factory in a village provides livelihoods for the villagers.
4. A new factory in a village causes noise pollution.

Answer 1

A rising price leading consumers to buy alternative goods demonstrates the substitution effect, while a new factory providing jobs or causing noise pollution illustrates positive and negative externalities, respectively. The correct option is 1. The rising price of gold causes people to buy silver jewelry instead.

Step-by-step explanation:

The scenarios provided by the student can be matched with the economic concepts as follows:

• The substitution effect is when consumers replace a more expensive item with a less costly alternative. The rising price of gold causing people to buy silver jewelry instead (scenario 1) is an illustration of the substitution effect.
• The reduction of chicken intake by families due to an increase in its price (scenario 2) also demonstrates the substitution effect.
• A new factory providing livelihoods for villagers (scenario 3) represents a positive externality, as it creates benefits for third parties.
• Noise pollution caused by a new factory in a village (scenario 4) is an example of a negative externality because it imposes costs on others.

The correct option is 1. The rising price of gold causes people to buy silver jewelry instead.