Question

The change in the optimum quantity of a good when its price changes and the consumer's income is adjusted so that she/he can just buy the bundle that she/he was buying before the price change is called________________

• A. The substantive effect
• B. The shut-down point
• C. The supernormal profit
• D. The substitutive effect

Hint:

Remember the decomposition of the Price Effect: Price Effect = Substitution Effect + Income Effect. The key to identifying the substitution effect is the condition that real income (or the ability to buy the original bundle) is held constant.

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
In microeconomics, when the price of a good changes, the total change in the quantity demanded by a consumer is called the Price Effect. This Price Effect can be broken down into two components: the Substitution Effect and the Income Effect.

Step 2: Detailed Explanation:


Substitution Effect: This measures the change in consumption of a good solely due to the change in its relative price. To isolate this effect, we theoretically hold the consumer's "real income" or "purchasing power" constant. The question describes exactly this: the consumer's money income is adjusted so they can still afford the original bundle of goods. This change in consumption, driven only by the product becoming relatively cheaper or more expensive, is the substitution effect. (The option "substitutive" is a slight variation of this term).
Income Effect: This measures the change in consumption due to the change in the consumer's real purchasing power that results from the price change.
The other options are irrelevant: 'Shut-down point' relates to a firm's production decision, and 'supernormal profit' is profit exceeding the normal rate. 'Substantive effect' is not a standard economic term in this context.

Step 3: Final Answer:
The described phenomenon is the Substitution Effect (referred to as the substitutive effect in the option).