Which of the following statements about the substitution effect of a fall in the price of bananas are correct?
(A) It lowers the demand for bananas.
(B) It makes bananas relatively dearer than mangoes.
(C) It raises the demand for bananas.
(D) The consumer substitutes bananas for mangoes.
(E) It is the change in the optimal quantity when income is adjusted so that she can just buy her old bundle.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (C), (D) and (E) only
When bananas become cheaper, they are cheaper relative to mangoes. The consumer buys more bananas and fewer mangoes. This is the substitution effect.
(A) It lowers the demand for bananas. — Incorrect. The substitution effect of a price fall raises demand for the good.
(B) It makes bananas relatively dearer than mangoes. — Incorrect. A fall in their price makes bananas relatively cheaper.
(C) It raises the demand for bananas. — Correct. She buys more of the good that has become cheaper.
(D) The consumer substitutes bananas for mangoes. — Correct. Bananas take the place of some mangoes.
(E) It is the change in the optimal quantity when income is adjusted so that she can just buy her old bundle. — Correct. Adjusting income removes the gain in purchasing power, so only the change in relative price is left.
NCERT (2026-27): “2.4.2 Deriving a Demand Curve from Indifference Curves and Budget Constraints … The negative slope of the demand curve can also be explained in terms of the two effects namely, substitution effect and income effect that come into play when price of a commodity changes. When bananas become cheaper, the consumer maximises his utility by substituting bananas for mangoes in order to derive the same level of satisfaction of a price change, resulting in an increase in demand for bananas. …” Glossary: “Substitution effect – The change in the optimal quantity of a good when its price changes and the consumer’s income is adjusted so that she can just buy the bundle that she was buying before the price change is called the substitution effect.” |