Dear Students,
I have just updated the Mock Exam 1 file with solutions.
I owe you a clarification concerning the solution to Exercise 13 (multiple choice).
Following our discussion during today's class, we concluded that the correct answer to that question was (D), although (B) could be good as well. Actually, after a second thought on the question, I have to say that the correct answer is (B) "Quantity demanded to decrease". Below I explain why.
The substitution effect isolates how a consumer responds to a change in relative prices, holding utility constant (i.e., we move along the same indifference curve to a new point where the marginal rate of substitution equals the new price ratio). When a good's price rises, it becomes relatively more expensive compared to other goods, so the consumer substitutes away from it. This effect always works in the opposite direction of the price change — it's what makes demand curves slope downward even before we consider the income effect.
Could (D) also be correct?
It's tempting, because the substitution effect does involve moving to a different point on the indifference curve, which is technically a different bundle. However, there are two problems with (D):
- Perfect complements (L-shaped indifference curves): When goods must be consumed in fixed proportions, the substitution effect is exactly zero. The consumer doesn't switch to a different bundle along the indifference curve because the "corner" of the L is the only rational point. In this case (D) would be false, so it doesn't always hold.
- Lack of precision: (D) doesn't tell us the direction of the change, which is the economically meaningful insight. The whole point of identifying the substitution effect is that it reliably predicts a decrease in the quantity demanded of the good whose price rose.
Interestingly, the same perfect-complements edge case means (B) is also not literally universal—with perfect complements the substitution effect is zero, not negative. But the standard textbook convention treats (B) as correct, either by implicitly assuming some degree of substitutability or by interpreting "decrease" as "decrease or stay the same." In an exam setting, (B) is unambiguously the intended answer.
Prof.ssa Lucia Leonelli
