Question

An increase in the price of a substitute good will cause the equilibrium price of its substitute to _______ and the equilibrium quantity to _________.a. increase; increaseb. increase; decreasec. decrease; decreased. decrease; increase

Answer 1

Answer:

(b). Increase ; Decrease

Explanation:

When the price of a substitute good rises, then it becomes more profitable for suppliers to shift to the other good. Therefore the supply of given good decreases, and the supply curve shifts leftward.

For example, if you're a textile manufacturer who produces cotton and silk clothes if the price of silk rises you'll reduce cotton production to divert resources towards silk. Therefore the demand for cotton clothes reduces.

Due to the leftward shift of the supply curve, the equilibrium price increases and equilibrium quantity decreases.

So we can conclude that an increase in the price of a substitute good will cause the equilibrium price of its substitute to increase and the equilibrium quantity to decrease.

Hence, the option (b) is the correct option.