Which of the following is true concerning the substitution effect of a decrease in price?

A) It will lead to an increase in consumption only for a normal good.
B) It always will lead to an increase in consumption.
C) It will lead to an increase in consumption only for an inferior good.
D) It will lead to an increase in consumption only for a Giffen good.

Question

Brooks Lowenstein · Accepted Answer

Final Answer : B, Explanation :  The substitution effect of a decrease in price always leads to an increase in consumption, regardless of whether the good is normal, inferior or Giffen. The substitution effect is the result of consumers switching to the cheaper good when its price decreases, all else being equal. This leads to an increase in quantity demanded of the cheaper good and a decrease in quantity demanded of the more expensive alternative.

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