In consumer theory, the change in the optimal quantity of a good when its price changes and the consumer’s income is adjusted so that the original bundle is just affordable again is called what?

Introduction / Context:
Consumer theory in microeconomics explains how individuals choose bundles of goods to maximise their satisfaction subject to budget constraints. When the price of a good changes, the consumer’s optimal bundle changes due to two distinct forces: the substitution effect and the income effect. This question tests whether you can correctly identify the substitution effect from a formal description involving an income adjustment that keeps the original bundle just affordable.

Given Data / Assumptions:
- The price of a particular good changes in the consumer’s budget constraint.
- The consumer’s income is then adjusted so that the original consumption bundle lies exactly on the new budget line.
- We are interested in the change in the optimal quantity consumed after this compensated income adjustment.
- The question asks for the name of this specific change in quantity demanded.

Concept / Approach:
When the price of a good changes, total change in quantity demanded can be decomposed into substitution effect and income effect. The substitution effect isolates the pure effect of the relative price change by adjusting income so that the consumer can still just afford the original bundle, keeping real purchasing power constant. Any change in the consumer’s optimal choice under this compensated budget is the substitution effect. The remaining change, when we move from the compensated budget to the actual new budget without income adjustment, is the income effect. The description in the question matches the standard definition of the substitution effect.

Step by Step Solution:
Step 1: Recognise that the question describes a process where income is adjusted after a price change so that the original bundle remains just affordable. Step 2: Recall that this is exactly how economists construct the substitution effect: compensate the consumer so that real purchasing power is held constant. Step 3: The change in the optimal quantity demanded under this compensated budget is, by definition, the substitution effect. Step 4: Option B names the substitution effect of a price change as the relevant concept, matching the description. Step 5: Option A refers broadly to the law of demand, which includes both substitution and income effects and does not describe the compensating income adjustment explicitly. Step 6: Options C and D are generic terms that do not refer to the specific decomposition of a price effect, so they are not correct.

Verification / Alternative check:
Consider a consumer who initially chooses a bundle with some quantity of tea and coffee at given prices and income. If the price of tea falls, the budget line rotates outward, and the consumer can afford more of both goods. To study the substitution effect, we reduce the consumer’s income just enough so that the original bundle lies exactly on the new rotated budget line. Under this compensated budget, the consumer will generally choose more tea and less of other goods because tea is now relatively cheaper. This change, holding real purchasing power constant, is the substitution effect. When we restore the consumer’s full income, any further change in choice is the income effect. This confirms that the description in the question refers to the substitution effect.

Why Other Options Are Wrong:
Option A is wrong because the law of demand summarises the overall inverse relationship between price and quantity demanded and does not refer specifically to compensated income adjustments.
Option C is wrong because the problem of choice is a broad term for consumer decision making and does not capture the specific decomposition of price changes into substitution and income effects.
Option D is wrong because optimal choice without income adjustment refers to the final demand after both effects, not to the compensated change described in the question.

Common Pitfalls:
A common error is to confuse the total effect of a price change with the substitution effect alone. Students sometimes forget that the substitution effect keeps real income constant by adjusting money income, while the income effect arises from the change in real purchasing power. Another pitfall is to treat the term substitution effect as something that only happens for normal goods, although it exists for both normal and inferior goods. Remember that the key signal of a substitution effect definition is a price change combined with an income change that keeps the original bundle just affordable.

Final Answer:
The substitution effect of a price change on optimal choice.