The effect of a change in relative price on consumer choice can be divided into:

Question

BlackTom AI · Accepted Answer

The question asks about how a change in relative price affects consumer choice.
First, I’ll restate the key concept: when the price of a good changes relative to others, two distinct channels influence consumer decisions.

Income effect: A price change alters the consumer’s purchasing power. If the price of a good falls, the consumer effectively has more real income and can buy more goods overall; if the price rises, real income falls and consumption may decrease for some goods.

Substitution effect: A price change also changes the relative attractiveness of goods. When one good becomes cheaper relative to others, consumers substitute toward the cheaper good and away from relatively more expensive ones, holding overall utility constant.

Why these two effects are used together: Together, the income effect and the substitution effect capture the full impact of a price change on consumption. In some cases, they move in the same direction (e.g., most normal goods), reinforcing the total effect. In other cases (e.g., inferior goods or Giffen goods), the income and substitution effects can oppose each other, producing a more nuanced outcome for quantity demanded.

Because the question asks about the division of the effect, the standard and widely accepted decomposition is into the income effect and the substitution effect. Any statement proposing a single, indivisible explanation for all changes in consumption due to price changes would be inconsistent with this foundational concept.

If other answer choices were present, you would evaluate them by asking:
- Do they attribute a portion of the effect to changing purchasing power (income effect)?
- Do they attribute a portion to the reshaping of relative prices and substitution between goods (substitution effect)?
- Do they acknowledge that both or only one of these could be present depending on the good and the situation?

In short, the canonical decomposition of the effect of a relative price change on consumer choice is into the income effect and the substitution effect, reflecting changes in purchasing power and changes in relative attractiveness of goods respectively.

ECON 2001.01 SP2025 (25209) Midterm 2

The effect of a change in relative price on consumer choice can be divided into:

View Explanation

Log in for full answers

Similar Questions

Sarah usually buys 5 cups of coffee and 2 muffins every day. The price of coffee falls significantly. Explain how the substitution effect and the income effect influence Sarah’s decision to buy more coffee.

For Sarah, meals at McDonald’s are an inferior good. When the price of meals at McDonald’s increases, Sarah buys less McDonald’s meals. This means that:

If a good is normal and its price increases,

Which of the following occurs simultaneously with an income effect?

Rose is allocating her budget between two goods—Apples and Bananas; both are normal goods. If the price of apples increases from $1 per pound to $2 per pound, then the income effect causes her to buy _of apples and the substitution effect causes her to buy_ of apples.

Which of the following occurs simultaneously with an income effect?

Assume that a consumer has well-behaved preferences. Following a price increase for good 1, we observe that a consumer increases the quantity demanded for good 1. From this, we know that

Consider a consumer buying perfect complements. If there is a decrease in the price of good 1, the total change in consumption of good 1 is due to

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler

ECON 2001.01 SP2025 (25209) Midterm 2

The effect of a change in relative price on consumer choice can be divided into:

View Explanation

Log in for full answers

Similar Questions

Sarah usually buys 5 cups of coffee and 2 muffins every day. The price of coffee falls significantly. Explain how the substitution effect and the income effect influence Sarah’s decision to buy more coffee.

For Sarah, meals at McDonald’s are an inferior good. When the price of meals at McDonald’s increases, Sarah buys less McDonald’s meals. This means that:

If a good is normal and its price increases,

Which of the following occurs simultaneously with an income effect?

Rose is allocating her budget between two goods—Apples and Bananas; both are normal goods. If the price of apples increases from $1 per pound to $2 per pound, then the income effect causes her to buy ___of apples and the substitution effect causes her to buy___ of apples.

Which of the following occurs simultaneously with an income effect?

Assume that a consumer has well-behaved preferences. Following a price increase for good 1, we observe that a consumer increases the quantity demanded for good 1. From this, we know that

Consider a consumer buying perfect complements. If there is a decrease in the price of good 1, the total change in consumption of good 1 is due to

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Rose is allocating her budget between two goods—Apples and Bananas; both are normal goods. If the price of apples increases from $1 per pound to $2 per pound, then the income effect causes her to buy _of apples and the substitution effect causes her to buy_ of apples.