Question : Statement 1: The substitution effect occurs when a consumer switches from one good to another due to a change in relative prices.
Statement 2: The income effect refers to the change in quantity demanded of a good due to a change in the consumer's purchasing power.
Option 1: Statement 1 is true, and statement 2 is false.
Option 2: Statement 1 is false, and statement 2 is true.
Option 3: Both statement 1 and statement 2 are true.
Option 4: Both statement 1 and statement 2 are false.
Correct Answer: Both statement 1 and statement 2 are true.
Solution : The correct answer is (c) Option C: Both statement 1 and statement 2 are true.
Statement 1 is true. The substitution effect occurs when a consumer adjusts their consumption choices in response to a change in the relative prices of goods. If the price of one good decreases relative to another, consumers tend to switch from the more expensive good to the cheaper one.
Statement 2 is also true. The income effect refers to the change in quantity demanded of a good due to a change in the consumer's purchasing power resulting from a change in income. When a consumer's income increases, they can afford to purchase more of a good, leading to an increase in the quantity demanded, and vice versa.
