What effect is working when the price of a good falls and consumers tend to buy it instead of other goods ?
Correct answer: C. The substitution effect
- A. The ceteris paribus effect
- B. The diminishing marginal utility effect.
- C. The substitution effect
- D. The income effect
Explanation
The substitution effect occurs when a fall in a good's price makes it relatively cheaper than alternatives, leading consumers to substitute toward it. The income effect instead reflects the increase in consumers' real purchasing power.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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