[amp_mcq option1=”Price effect = Income effect \u00c3\u0097 Substitution effect” option2=”Price effect = Substitution effect – Income effect” option3=”Price effect = Income effect + Substitution effect” option4=”Price effect = Income effect – Substitution effect” correct=”option3″]<\/p>\n
The correct answer is: C. Price effect = Income effect + Substitution effect.<\/p>\n
The price effect is the change in the quantity demanded of a good due to a change in its price. The income effect is the change in the quantity demanded of a good due to a change in the consumer’s income. The substitution effect is the change in the quantity demanded of a good due to a change in its relative price, holding the consumer’s income constant.<\/p>\n
The price effect can be decomposed into two components: the income effect and the substitution effect. The income effect is negative, meaning that a decrease in the price of a good will lead to an increase in the quantity demanded of that good, as consumers will have more money to spend on other goods. The substitution effect is positive, meaning that a decrease in the price of a good will lead to an increase in the quantity demanded of that good, as consumers will substitute that good for other goods that have become relatively more expensive.<\/p>\n
Therefore, the price effect is equal to the income effect plus the substitution effect.<\/p>\n
Option A is incorrect because the income effect and the substitution effect are not multiplied together. Option B is incorrect because the income effect and the substitution effect are not subtracted from each other. Option D is incorrect because the income effect and the substitution effect are not added together.<\/p>\n","protected":false},"excerpt":{"rendered":"
[amp_mcq option1=”Price effect = Income effect \u00c3\u0097 Substitution effect” option2=”Price effect = Substitution effect – Income effect” option3=”Price effect = Income effect + Substitution effect” option4=”Price effect = Income effect – Substitution effect” correct=”option3″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[],"class_list":["post-50306","post","type-post","status-publish","format-standard","hentry","category-economics","no-featured-image-padding"],"yoast_head":"\n