Question

If the prices of 2 goods double, will there be a substitution effect?

Answer 1

Answer: The substitution effect occures when there is rise in price of one good which leads to consumer switches to relatively cheaper alternative and thus the demand for that good falls.

Example:- When price of tea is $4 and price of coffiee is $2 then in general the consumers will shift their demand towars coffee as it it is relatively cheaper alternative.

Here in the above given case as the price of both the goods double then there will be no relative change in price and thus the consumer will not shift their demand for any of the goods considering the relative change in prices of both the goods remains same. Hence the substitution effect will not occur.