Question

Substitution and income effects of a change in price of a good may be used to explain the:
a. inverse relationship between price and quantity demanded.
b. direct relationship between price and quantity purchased.
c. inverse relationship between price and quantity demanded.
d. direct relationship between price and quantity supplied.
e. direct relationship between income and demand.

Answer 1

Answer: Option A  

   

Explanation: In simple words, substitution effect refers to the economic phenomenon which states that when price of one good rises the demand for the alternative of that particular good also rises. For example - coke and pepsi.

On the other hand, income effect states that when the price of a commodity rises, a number of consumers might find it hard to purchase due to the price exceeding their income power which further results in lower demand.

Hence from the above we can conclude that the correct option is A.