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Q: What is the substitution effect? A. All goods have a substitute, and the rise in price for substitutes causes a rise in supply for goods. B. When the price of one good falls, the demand for
complements for that good rises, and vice versa. C. When the price of one good rises, the demand for substitutes for that good rises, and vice versa. D. All goods have a complement, and the rise in price for substitutes causes a fall in supply for goods.
A: C. When the price of one good rises, the demand for substitutes for that good rises, and vice versa. [ || An effect caused by a rise in price that induces a consumer (whose income has remained the same) to buy more of a relatively lower-priced good and less of a higher-priced one. Substitution effect is always negative for the seller: consumers always switch from spending on higher-priced goods
to lower-priced ones as they attempt to maintain their living standard in face of rising prices. Substitution effect is not confined only to consumer goods, but manifests in other areas as well such as demand for labor and capital. See also income effect. ]
Expert answered|ouanne01|Points 230|
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Asked 7/28/2011 5:22:32 AM
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