What Is the Substitution Effect of a Price Change

question 118

Multiple Choice

What is the substitution effect of a price change?

• A) Consumers will buy more of the good whose relative price has risen and less of the good whose relative price has fallen.
• B) When prices fall, consumers will have more purchasing power and buy more of the good whose price has fallen.
• C) When prices fall, consumers will have more purchasing power and buy more of all goods.
• D) Consumers will consume less of the good whose relative price has risen and more of the good whose relative price has fallen.

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Definitions:

Operating Cost

Expenses associated with the day-to-day operations of a business, excluding costs related to direct material and direct labor.

Useful Life

The estimated period that an asset is expected to be usable for the purpose it was acquired.

Differentiation Value

The perceived value added to a product or service through unique features and qualities that set it apart from competitors.

Value-based Pricing

A pricing strategy where the price of a product or service is based on the perceived value to the customer rather than the cost of production.