Suppose that goods A and B are close substitutes. If the price of good A falls, then we would expect an:

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Consider the scenario where goods A and B are close substitutes. When the price of A falls, consumers respond first by increasing the quantity demanded of A itself due to the downward-sloping demand curve for A. At the same time, because A becomes relatively cheaper than B, some buyers switch away from B to A, which lowers the overall demand for B.

Option 1: 'Increase in the demand for A and an increase in the quantity of B demanded' would imply that B becomes more desirable or that consumers simultaneously want more of both goods. Since A’s price drop makes A cheaper relative to B, demand for B is unlikely to rise; this contradicts the substitution effect.

Option 2: 'Increase in the demand for A and a decrease in the quantity of B demanded' mixes two ideas that are not aligned. While the quantity demanded for A should rise, the phrasing about B’s "quantity demanded" decreasing ignores that price movement typically affects B’s whole demand, not just a shift in quantity in the same sense. The standard effect is a shift in B’s demand downward (a decrease in quantity demanded at the original price) rather than a pure change in quantity demanded depending on the context.

Option 3: 'Increase in the quantity of A demanded and a decrease in the demand for B' aligns with the core substitution-insight: A becomes cheaper, more people buy more of A (quantity demanded increases), and fewer people demand B (demand for B decreases due to substitution).

Option 4: 'Increase in the demand for good A as well as for good B' suggests both goods become more demanded in total, which contradicts the logic of substitutability when A’s price falls; B’s demand would not rise as consumers substitute toward the cheaper option.

In summary, the only option that cleanly matches the standard substitution effect and the law of demand for A is option 3, which describes a higher quantity demanded for A and a decreased demand for B as a result of A’s price fall.

Suppose that goods A and B are close substitutes. If the price of good A falls, then we would expect an:

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