Question

What is it called where consumers react to rising prices by consuming less of a good and more of it's competitors?

Group of answer choices

Substitute Effect

Income Effect

Option Effect

Money Effect

Answer 1

Substitute Effect

Step-by-step explanation:

When a product's price increases, it becomes relatively expensive compared to its alternatives. The high price will encourage consumers to choose other goods that are relatively cheaper. Consequently, the price increase reduces the demand for the product while increases the demand for its substitutes.

The substitution effect describes how consumption is affected by an increase or a decrease in a product's price.