The Substitution Effect of a Price Change

question 89

Multiple Choice

The substitution effect of a price change

• A)will result in the consumer buying less of a good at a lower price.
• B)will result in the consumer buying less of a good at a higher price.
• C)outweighs the income effect for Giffen goods.
• D)is equal to the income effect for normal goods.
• E)is equal to the income effect for inferior goods.

Understand the concept of the marginal rate of substitution and how it relates to consumer choice.

Interpret graphical data related to consumer preferences and budget constraints to determine optimal consumption points.

Derive and understand the implications of individual demand curves from budget constraints and indifference curves.

Understand the relationship between indifference curves, budget lines, and consumer equilibrium.

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Definitions:

Efficient Allocation

An economic condition where resources are distributed in a way that maximizes the welfare of society, ensuring that every good or service is produced up to the point where the last unit provides a benefit equal to the cost of producing it.

Risk

Uncertainty about future outcomes.

Risk-Averse

A description of an individual or organization that prefers to avoid uncertainty and is willing to sacrifice some potential gain to avoid risk.

Expected-Utility Maximizer

An economic concept referring to an individual who chooses between uncertain prospects by comparing their expected utilities.