Economics Quiz: Substitution Effect and Income Effect

What is the definition of substitution effect in economics?

• The substitution effect in economics refers to the change in consumption patterns due to a change in the relative prices of goods.

• The substitution effect in economics is the increase in demand for a product when its price increases

• The substitution effect in economics is the change in consumption patterns due to a change in income

• The substitution effect in economics is the decrease in demand for a product when its price decreases

What is the definition of income effect in economics?

• The income effect in economics refers to the change in quantity supplied of a good due to a change in real income.

• The income effect in economics refers to the change in price of a good due to a change in real income.

• The income effect in economics refers to the change in demand for a good due to a change in real income.

• The income effect in economics refers to the change in quantity demanded of a good due to a change in real income.

How is the substitution effect graphically represented?

• The substitution effect is graphically represented by an upward sloping demand curve.

• The substitution effect is graphically represented by a horizontal demand curve.

• The substitution effect is graphically represented by a vertical demand curve.

• The substitution effect is graphically represented by a downward sloping demand curve.

Explain the concept of substitution effect with an example.

• If the price of coffee decreases, consumers may buy more tea and more coffee

• If the price of coffee decreases, consumers may buy less coffee and more tea

• If the price of coffee decreases, consumers may buy more coffee and more tea

• if the price of coffee decreases, consumers may buy more coffee and less tea, assuming they are substitutes.

Explain the concept of income effect with an example.

• The income effect refers to the change in demand for goods due to changes in income, such as buying more necessities and less luxury items.

• a person's income increases, they may choose to buy more luxury goods and less inferior goods, demonstrating the income effect.

• If a person's income increases, they may choose to buy more inferior goods and less luxury goods, demonstrating the income effect.

• When a person's income decreases, they may choose to buy more luxury goods and less inferior goods, demonstrating the income effect.

How does a change in the price of a substitute good affect the substitution effect?

• A decrease in the price of a substitute good will decrease the substitution effect, as consumers will be less likely to switch to the original good.

• A decrease in the price of a substitute good will have an opposite effect on the substitution effect, causing consumers to switch to the substitute good.

• An increase in the price of a substitute good will increase the substitution effect, as consumers will be more likely to switch to the original good.

• A change in the price of a substitute good has no effect on the substitution effect.

How do the substitution effect and the income effect impact consumer behavior?

• They have no impact on consumer behavior

• They only impact the quality of goods and services

• The substitution effect and the income effect impact consumer behavior by influencing the quantity and types of goods and services that consumers purchase in response to changes in price and income.

• They only impact the price of goods and services

Discuss the real-life implications of the substitution effect and the income effect on consumer choices.

• The substitution effect refers to consumers switching to healthier food options, while the income effect refers to consumers being influenced by peer pressure.

• The substitution effect refers to consumers buying more expensive goods, while the income effect refers to consumers being influenced by advertising.

• The substitution effect refers to consumers substituting goods for services, while the income effect refers to consumers saving money for future purchases.

• The substitution effect refers to the change in consumption patterns due to the relative price change of goods, while the income effect refers to the change in consumption patterns due to changes in purchasing power.

Demand Curves slope downward because of the law of _____ marginal utility

Income effect: amount people buy changes as purchasing ____ of their income changes changes