Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It leads to an increase in marginal utility for the cheaper good, encouraging consumers to buy more of it.
B
It causes consumers to maintain their original consumption levels despite price changes.
C
It results in a decrease in total utility regardless of price changes.
D
It only applies to inferior goods and has no effect on normal goods.
Understanding the Answer
Let's break down why this is correct
Answer
The substitution effect happens when the price of a good changes, leading consumers to switch to a different product that is now relatively cheaper. For example, if the price of apples decreases, people might buy more apples instead of oranges because apples give them more satisfaction for their money. This shift in purchasing helps consumers maximize their utility, or happiness, as they adjust their choices based on the new prices. When prices change, consumers aim to get the most enjoyment from their budget by substituting more expensive items with cheaper alternatives. Therefore, the substitution effect plays a key role in how consumers respond to price changes to maintain or increase their overall satisfaction.
Detailed Explanation
When the price of a good goes down, it becomes cheaper. Other options are incorrect because Some might think people stick to their old habits even when prices change; It's a common mistake to think that price changes always hurt overall satisfaction.
Key Concepts
marginal utility
substitution effect
Topic
Consumer Utility Maximization
Difficulty
medium level question
Cognitive Level
understand
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