The Substitution Effect Argues That a Consumer

question 278

Multiple Choice

The substitution effect argues that a consumer

• A) will always use the additional purchasing power from a price decrease to purchase more of both goods.
• B) will not purchase more of a good when its price falls.
• C) will purchase more of a good that has become relatively cheaper, and less of a good that has become relatively more expensive.
• D) will purchase less of both goods if his or her real income increases.

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Definitions:

Excess Capacity

A situation where a firm is producing at a lower scale of output than it has been built to handle, due to insufficient demand.

Product Diversity

The variety of different items within a particular category available to consumers in the market.

Monopolistic Competition

A market structure characterized by many firms offering products that are similar but not identical, allowing for slight differentiation among them.

Long-Run Equilibrium

A state in which all factors of production and costs are variable, and economic agents have fully adjusted to any economic changes.