The Substitution Effect of an Increase in the Price of Raisin

question 1

Multiple Choice

The substitution effect of an increase in the price of Raisin Bran refers to

• A) the decrease in the demand for Raisin Bran when its price rises.
• B) the result that consumers will now switch to a substitute good such as Cheerios, and the demand curve for Raisin Bran shifts to the left.
• C) the fact that the higher price of Raisin Bran lowers consumer's purchasing power, holding money income constant.
• D) the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, cause consumers to buy less Raisin Bran.

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Definitions:

Supply Curve

A graphical representation showing the relationship between the price of a good and the quantity of the good that suppliers are willing to offer for sale, holding other factors constant.

Equilibrium Price

The market price at which the supply of an item equals the quantity demanded.

Equilibrium Quantity

The volume of goods or services that are both presented and required at the price where supply meets demand in a market.

Quantity Demanded

Refers to the total amount of a good or service that consumers are willing to purchase at a given price.