Question

Substitution effect for a fall in the price of a commodity is given by _________.

• A. an upward shift in indifference curve
• B. an movement up of a given indifference curve
• C. a downward shift in indifference curve
• D. a movement down a given indifference curve

Answer 1

The correct option is D a movement down a given indifference curve

In the indifference curve analysis we assume that a consumer has to choose between two goods and that his/her income is constant. If the price of either one or both the goods reduces, it means the consumer can purchase more goods. The result of an change in purchase of either good due to change in price of good with no change in income results in a substitution effect. This is the same as the income effect. This is because for normal goods both the income and substitution effect work in the same direction.