BUSINESS ADMINISTRATION
BUSINESS ECONOMICS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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1.substitution effect
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2.income effect
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3.both 1 & 2
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4.none of the above
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Detailed explanation-1: -So when relative price change, the quantity demanded of good changes keeping the level of utility remains constant is called the substitution effect.
Detailed explanation-2: -The substitution effect is the change in consumption resulting from a price change keeping utility constant. The substitution effect always involves a reduction in the good whose price increased.
Detailed explanation-3: -What Is the Substitution Effect? The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises.
Detailed explanation-4: -The substitution effect states that when the price of a good decreases, consumers will substitute away from goods that are relatively more expensive to the cheaper good.
Detailed explanation-5: -A positive substitution effect implies that consumers can still afford a good or a service even if the good or service price increases or the consumers’ income declines. A negative income effect implies that an increase in consumers’ income will decrease the demand for that particular good or service.