Question

Suppose the price of chocolate has increased. According to the substitution effect only, the consumption of chocolate should:

a. increase;

b. decrease if chocolate is a normal good;

c. increase if chocolate is a Giffen good;

d. decrease;

e. stay constant if preferences are quasi-linear.

Answer 1

If price of chocolate has increased then as per substitution effect the consumption of chocolate should -

D) Decrease

As per substitution effect when price of the one good is increase then the demand for other substitute goods will be increases and if price of one goods is decreases then demand for other substitution goods is decreases.because demand shift to other substitute goods.

Here rise of chocolate price can decrease the demand for chocolate and it enhance the demand of substitute product.