Which of the following is an example of the substitution effect in regard to substitute resources?

• A. A consumer buys more coffee when their income increases.
• B. A consumer buys less tea when the price of tea decreases.
• C. A consumer continues to buy the same amount of coffee even when its price rises.
• D. A consumer buys more tea when the price of coffee increases.

Answer: (D)

Verified step by step guidance

1. Understand the concept of the substitution effect: it occurs when a change in the price of a good causes consumers or producers to substitute that good with another good, typically a close substitute, because relative prices have changed.
2. Identify that the substitution effect focuses on how changes in relative prices influence the quantity demanded or used of substitute goods, holding utility or output constant.
3. Analyze each option to see if it reflects a change in behavior due to a change in the price of one good leading to a change in the quantity demanded of another substitute good.
4. Recognize that the correct example involves a consumer buying more of one good (tea) when the price of its substitute (coffee) increases, illustrating substitution away from the now more expensive good toward the relatively cheaper substitute.
5. Conclude that the substitution effect is best illustrated by the consumer increasing tea consumption as coffee becomes more expensive, because this shows substitution between resources based on relative price changes.