When Price Rises,the Substitution Effect

question 37

Multiple Choice

When price rises,the substitution effect

• A)always increases consumption.
• B)increases consumption for normal goods only.
• C)decreases consumption for normal goods only.
• D)decreases consumption for inferior goods only.
• E)does none of the above.

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Definitions:

Margin of Safety Percentage

A financial metric indicating the difference between actual or forecasted sales and sales at the break-even point, expressed as a percentage of total sales.

Degree of Operating Leverage

A measure that quantifies the percentage change in a company's operating income resulting from a percentage change in its sales volume.

Net Operating Income

The profit a business makes after subtracting operating costs, yet prior to removing interest and tax expenses.

Contribution Margin Ratio

The contribution margin ratio measures the percentage of sales revenue remaining after covering variable costs, contributing to covering fixed costs and generating profit.