The correct answer is: D. in the same direction.
The substitution effect is the tendency for consumers to substitute a good that has become relatively cheaper for a good that has become relatively more expensive. When the price of a good decreases, consumers will tend to buy more of that good and less of other goods that are substitutes for it. This is because the good is now relatively cheaper, so consumers will get more “bang for their buck” by buying more of it.
The income effect is the tendency for consumers to buy more of all goods when their income increases. When the price of a good decreases, consumers will have more money to spend on other goods. This is because the good is now relatively cheaper, so consumers will have more money left over after buying the good.
The substitution effect and the income effect can work in opposite directions. For example, if the price of bread decreases, the substitution effect will cause consumers to buy more bread. However, the income effect may cause consumers to buy less bread, because they now have more money to spend on other goods.
In general, the substitution effect is stronger than the income effect for most goods. This means that the price of a good has a greater impact on the quantity demanded of the good than the consumer’s income.
Here are some additional details about each option:
- Option A: Unity. This is incorrect because the substitution effect is not always equal to unity. In fact, the substitution effect is usually less than unity.
- Option B: Zero. This is incorrect because the substitution effect is always positive. In other words, the substitution effect always causes consumers to buy more of a good when the price of the good decreases.
- Option C: In the opposite direction. This is incorrect because the substitution effect is always in the same direction as the price change. In other words, the substitution effect always causes consumers to buy more of a good when the price of the good decreases.