Question

What effect is working when the price of a good falls and consumers tend to buy it instead of other goods?

    a. the income effect.

    b. the substitution effect.

    c. the diminishing marginal utility effect.

    d. the ceteris paribus effect.

Answer 1

Please rate the answer
Answer
b) substitution effect

Though both substitution and income effect apply here , substitution effect is more prominent . It is the change in the consumption to the change in the relative prices of the goods .
Income  effect is the incorrect option as it functions when there is a change income of the consumer .
When the price of a good falls consumer buys more of the cheaper good (substitutes expensive goods) .

After this effect , income effect functions .
Due to the rise in his real purchasing power , he buys more of the cheaper good A consumer's income is freed up when price of a good decreases.