Which of the following exemplifies the substitution effect?

• A. A consumer buys more coffee after their income increases.
• B. A consumer continues to buy the same amount of coffee despite a price increase.
• C. A consumer buys less coffee because they dislike its taste.
• D. A consumer buys more tea and less coffee after 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 to substitute that good with another, typically because the relative prices have changed.
2. Identify that the substitution effect focuses on changes in consumption due to relative price changes, holding the consumer's utility level constant (ignoring income effects).
3. Analyze each option to see if it involves a change in consumption caused by a change in relative prices between goods.
4. Recognize that buying more tea and less coffee after the price of coffee increases is a classic example of the substitution effect, as the consumer substitutes the now relatively more expensive coffee with tea.
5. Conclude that the substitution effect is best exemplified by the consumer buying more tea and less coffee after the price of coffee rises, rather than changes caused by income or preferences.