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      Question

      The substitution effect under the law of demand refers

      to which of the following situations?
      A Consumers buy more of a good when their income increases Correct Answer Incorrect Answer
      B Consumers switch to a cheaper alternative when the price of a good rises Correct Answer Incorrect Answer
      C Consumers buy less of a good when prices remain constant Correct Answer Incorrect Answer
      D Consumers purchase a good regardless of price changes Correct Answer Incorrect Answer
      E Consumers continue buying luxury goods even after price increases Correct Answer Incorrect Answer

      Solution

      The Law of Demand works primarily because when the price of a good decreases: ·       Substitution effect: Consumers switch from relatively expensive goods to the cheaper one.  The substitution effect occurs when the price of a good increases , making it relatively more expensive compared to its substitutes , leading consumers to shift consumption to cheaper alternatives . This contributes to the inverse relationship between price and quantity demanded ·       Income effect: The lower price increases real purchasing power, allowing consumers to buy more.
      These two effects together explain why demand increases when price falls.

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