Which of the following scenarios best illustrates the substitution effect? Select one: a. Eddie goes out...

Which of the following scenarios best illustrates the substitution effect?

Select one:

a. Eddie goes out more after his car insurance premium (price of insurance) drops

b. Gail buys more cereal when the price of milk drops

c. Latisha trades in her five years old car for a new and better car

d. Maggie buys a new house after she becomes a partner in a major law firm

e. Ricky starts using public transportation when the price of gasoline increases

Solutions

Expert Solution

Option (e) correctly illustrates substitution effect since as Gasoline prices rises people switched to Public transport (cheaper option) compared to personal vehicle. c and d talks about buying new product without any other product being impacted. Option (a) and (b) are not substitution because of other product. Hence correct answer is option (e)

Rahul Sunny answered 2 years ago

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