Arizona State University (ASU) ECN212 Microeconomic Principles Exam 1 Practice

What effect does an increase in the price of one substitute have on another?

It decreases demand for the substitute It has no effect on the substitute It increases demand for the other substitute It causes a market surplus of both goods

Correct Answer:

It increases demand for the other substitute

Explanation:

An increase in the price of one substitute typically leads to an increase in the demand for the other substitute. This occurs because consumers tend to switch their preferences towards the relatively cheaper substitute when the price of one option rises. For instance, if the price of coffee increases, consumers may buy more tea, which serves as a substitute. This shift in consumer behavior highlights the concept of substitutable goods, where an increase in the price of one results in a greater demand for alternatives, demonstrating the interconnected nature of consumer choices in a market. This relationship between substitutes helps in understanding supply and demand dynamics and is a key principle in microeconomic theory.

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