Question : The substitution effect is related to changes in:
Option 1: Consumer income
Option 2: Consumer preferences
Option 3: Consumer prices
Option 4: Consumer savings
Correct Answer: Consumer prices
Solution : The correct answer is (c) Consumer prices.
The substitution effect refers to the change in consumption patterns that occurs when the relative prices of goods change while keeping the consumer's level of satisfaction or utility constant. When the price of one good decreases relative to another, consumers tend to substitute the relatively cheaper good for the more expensive one, thereby increasing its consumption. This substitution effect is driven by the desire to maximize utility given the new price ratio. Therefore, changes in consumer prices directly influence the substitution effect.
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