Question

What happens when consumers react to an increase in a good's price by consuming less of that good and more of other goods.

a) Elasticity of demand
b) Substitution effect
c) Law of demand
d) Complement

Answer 1

The substitution effect occurs when consumers react to an increase in a good's price by consuming less of that good and more of other goods.

Step-by-step explanation:

The correct answer is b) Substitution effect.

The substitution effect occurs when consumers react to an increase in a good's price by consuming less of that good and more of other goods. This is because consumers have an incentive to consume substitute goods with relatively lower prices.

For example, if the price of oranges increases, consumers may choose to buy fewer oranges and more apples instead. In this case, oranges are the good with a higher price and apples are the substitute good with a relatively lower price.