What Is the Substitution Effect

question 101

Multiple Choice

What is the substitution effect?

• A)The effect that a change in income has on the demand for a substitute product.
• B)The sacrifice which has to be made when an additional quantity of one product is purchased.
• C)The substitution of one product for another as a result of a change in their relative prices.
• D)The substitution of a normal product for an inferior product as the result of an increase in income.

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Definitions:

Cash Inflows

Funds received by a business from its operational activities, investments, or financing, contributing to its cash pool.

Time Value of Money

The belief that possessing money in the present is worth more than holding the same amount later on because it has the potential to increase in value.

Capital Budgeting Methods

Techniques used by companies to evaluate the desirability of investments or expenditures. Major methods include net present value (NPV), internal rate of return (IRR), and payback period.

Accounting Rate of Return

A measure of the return expected on an investment, calculated by dividing the average annual profit by the initial investment cost.