Asked by Minh Anh Tr?n Ng?c on May 05, 2024
Verified
When the price of a product falls, the income effect induces the consumer to purchase more of it, while the substitution effect prompts her to buy less.
Income Effect
The change in an individual's or economy's income and how that change will impact the quantity demanded of a good or service.
Substitution Effect
The change in consumption patterns due to a change in the relative prices of goods, leading consumers to substitute one good for another.
- Gain an insight into the effect of price fluctuations on consumer demand, analyzing the role of income and substitution effects.
Verified Answer
SJ
Sunil JogpalMay 12, 2024
Final Answer :
False
Explanation :
When the price of a product falls, the income effect makes the consumer feel richer, thus encouraging them to buy more of the product, while the substitution effect makes the product relatively cheaper compared to others, also encouraging the consumer to buy more of it.
Learning Objectives
- Gain an insight into the effect of price fluctuations on consumer demand, analyzing the role of income and substitution effects.
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