Which of the following exemplifies the substitution effect in regard to substitute resources?

• A. A consumer buys less margarine because the price of margarine decreases.
• B. A consumer switches from buying butter to buying margarine after the price of butter increases.
• C. A consumer continues to buy the same amount of butter even after its price increases.
• D. A consumer buys more butter because their income has increased.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the substitution effect concept. The substitution effect occurs when a change in the price of a good causes consumers to replace that good with a relatively cheaper substitute, holding the consumer's utility constant.
2. Step 2: Identify the role of substitute resources. Substitute resources are goods or inputs that can replace each other in consumption or production. When the price of one increases, consumers tend to buy more of the other substitute.
3. Step 3: Analyze each option in terms of substitution effect: For example, if the price of butter increases, consumers might buy more margarine instead, which is a substitute.
4. Step 4: Recognize that the substitution effect focuses on changes in relative prices and consumer choices between substitutes, not on income changes or unchanged consumption despite price changes.
5. Step 5: Conclude that the correct example of the substitution effect is when a consumer switches from buying butter to buying margarine after the price of butter increases, illustrating substitution between two goods due to relative price changes.