Question

4. The change in the quantity demanded of a good resulting from a change in relative price with the level of utility held constant is called the ________ effect.

Giffen

real price

income

substituition

Answer 1

The substitution effect can be defined as the effect which arise due to the change in the relative price. When price of a good changes, then one good become cheaper relative to other goods. It means with the same money more cheaper goods can be purchased and less of expensive goods.

So when relative price change, the level of utility remains constant. This is called the substitution effect.

Hence it can be said that the change in the quantity demanded of a good resulting from a change in the relative price with the level of utility remains constant is called the substitution effect.

Hence option fourth,: substitution effect is the correct answer.