Which of the following best describes the substitution effect?

• A. It is the change in demand for a good due to an increase in consumer income.
• B. It is the change in quantity demanded of a good resulting from a change in its price, making the good more or less attractive relative to other goods.
• C. It is the total benefit consumers receive from purchasing a good at a market price lower than their maximum willingness to pay.
• D. It is the increase in consumer surplus when the price of a good falls below the consumer's willingness to pay.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of the substitution effect in microeconomics. It refers to how consumers adjust their quantity demanded of a good when its price changes, holding the consumer's utility level constant.
2. Step 2: Recognize that the substitution effect isolates the change in quantity demanded due to the relative price change of the good compared to other goods, making it more or less attractive.
3. Step 3: Differentiate the substitution effect from the income effect, which is the change in demand due to a change in consumer income or purchasing power.
4. Step 4: Note that the substitution effect focuses on the consumer's tendency to substitute away from relatively more expensive goods toward relatively cheaper alternatives when prices change.
5. Step 5: Conclude that the best description of the substitution effect is: 'It is the change in quantity demanded of a good resulting from a change in its price, making the good more or less attractive relative to other goods.'