Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It causes the consumer to only purchase the cheaper good.
B
It leads to a reallocation of the budget towards the good that provides higher marginal utility per dollar spent.
C
It has no effect on the consumer's choices if the budget is fixed.
D
It allows consumers to ignore the prices of the goods entirely.
Understanding the Answer
Let's break down why this is correct
Answer
When a consumer has a limited budget, they aim to get the most satisfaction, or utility, from their purchases. The substitution effect occurs when the price of one good changes, making it either more or less appealing compared to another good. For example, if the price of apples drops, a consumer may buy more apples instead of oranges because they can get more fruit for their money. This shift in choice happens because the consumer wants to maximize their utility by choosing the combination of goods that provides the greatest satisfaction within their budget. Ultimately, understanding the substitution effect helps consumers make better decisions about how to spend their money to achieve the highest possible utility.
Detailed Explanation
When prices change, people often buy more of the good that gives them more satisfaction for each dollar spent. Other options are incorrect because Some might think that a person will only buy the cheaper item; It's a common belief that a fixed budget means choices won't change.
Key Concepts
substitution effect
utility function
utility-maximizing rule
Topic
Maximizing Utility with Budgets
Difficulty
hard level question
Cognitive Level
understand
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