Asked by
lissette parra
on Oct 25, 2024
Verified
You have just won a cash award of $500 for academic excellence.
A) The substitution effect of this award will be larger than its income effect.
B) The income effect of this award will be larger than its substitution effect.
C) The substitution and income effects will be of identical size.
D) It is impossible to know whether the substitution effect is larger than the income effect or vice versa.
Substitution Effect
The change in the consumption pattern of goods or services due to a change in their relative prices, causing consumers to replace more expensive items with cheaper alternatives.
Income Effect
The change in the quantity demanded of a good resulting from a change in consumer income, holding prices constant.
- Comprehend the principles of income effect, substitution effect, and wealth effect within the framework of consumer choice theory.
Verified Answer
PH
Learning Objectives
- Comprehend the principles of income effect, substitution effect, and wealth effect within the framework of consumer choice theory.