The Substitution Effect of a Price Decrease

question 6

Multiple Choice

The substitution effect of a price decrease:

• A)allows the consumer to obtain a higher level of well-being.
• B)reflects an increase in real income.
• C)is a movement along the indifference curve to consume more of the lower priced good and less of the higher priced good.
• D)is a shift of the indifference curve indicating higher consumption of both the goods.

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Definitions:

Compounded Annually

A method of calculating interest where the interest earned each year is added to the principal, and in the next year, interest is earned on the new principal sum.

Lump Sum

A singular transaction carried out at a specific point in time, as opposed to a sequence of smaller installments.

Savings

Money set aside for future use, often accumulating interest in a financial institution.

Rate of Return

The profit or deficit generated from an investment over an indicated time frame, shown as a ratio of the investment's initial cost.