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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BlackTom AI · Accepted Answer

When analyzing the effect of a fall in the price of A on goods A and B that are close substitutes, we start by distinguishing between the quantity demanded (a movement along the own demand curve) and demand (a shift of the entire demand curve).
Option 1: 'Increase in the demand for A and an increase in the quantity of B demanded' is incorrect. A fall in the price of A directly increases the quantity demanded of A (movement along A's own demand curve), not the overall demand for A. Moreover, B becomes less attractive as a substitute, so the quantity demanded of B would not rise; it would fall or stay unchanged at the same price level.
Option 2: 'Increase in the demand for A and a decrease in the quantity of B demanded' is flawed because the price drop of A does not shift A's demand curve outward; it changes A’s quantity demanded along its curve. The statement also mixes the idea of a quantity change for B with a demand change; typically, B’s quantity demanded would fall along its own curve due to substitution, not necessarily a decrease in demand for B as a whole. This makes the option inconsistent with standard substitution effects.
Option 3: 'Increase in the quantity of A demanded and a decrease in the demand for B' correctly captures the key ideas. The fall in A's price causes more people to buy more of A (higher quantity demanded along A’s curve). Because A and B are substitutes, some buyers switch from B to A, reducing the demand for B (a leftward shift of B’s demand curve) or, at minimum, reducing B’s quantity demanded at the original price. This option aligns with the substitution effect in consumer choice.
Option 4: 'Increase in the demand for good A as well as for good B' would imply both goods’ demand curves shift outward, which would not occur when the price of A falls. Since A becomes relatively cheaper, consumers do not simultaneously demand more of B in a way that shifts B’s entire demand curve outward; the substitution effect works in the opposite direction for B.
In summary, the only statement that accurately reflects the standard substitution-side effect of a fall in A’s price for close substitutes is that the quantity demanded of A rises while the demand for B falls.

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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