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Chapter 1: Q 6RQ. (page 9)

What is substitution effect?

Short Answer

Expert verified

It encourages a utility-maximizer to buy less of what is relatively more expensive and more of what is relatively cheaper.

Step by step solution

01

Step 1. Meaning of substitution effect

A substitution effect shows change in consumer's optimal consumption combination on an account of change in relative price alone and thereby change in the quantity purchased of X and Y goods, real income of consumer remains unchanged.It encourages a utility-maximizer to buy less of what is relatively more expensive and more of what is relatively cheaper.

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