Economic-law of demand-thank you?

Question

Which of the following is consistent with the law of demand?

People substitute higher-priced goods for higher-quality goods.

People substitute some higher-priced goods for other higher-priced goods.

People substitute lower-priced goods for higher-priced goods.

People substitute some lower-priced goods for other lower-priced goods.

Answer 1

The answer is c).  If the price of Coke goes down, then the demand curve for Pepsi would shift to the right, i.e. substitutes in consumption, which reflects the substitution effect which is consistent with the law of demand.  It doesn't mean Pepsi is a "cheap" good, just that its price is relatively lower which causes the above to occur.

Answer 2

This question is very poorly written. When you think about substitutes, I typically think: margarine instead of butter, or Adidas instead of Nike....when you're substituting goods, you're really looking for something of comparable price and quality, so typically, people would substitute some higher priced goods for other higher priced goods, assuming they are of comparable quality.

Answer 3

c) People substitute lower-priced goods for higher-priced goods.

Answer key is here:

http://www.swcollege.com/bef/arnold/inst...