Question

Gasoline and bicycles are complements in consumption. Suppose we increase the federal gasoline tax to $1 per gallon. What are the initial changes that result from the tax as these markets adjust to a new general equilibrium?A) Gasoline price rises, demand for bicycles shift s leftward.B) Gasoline price rises, demand for bicycles shifts rightward.C) Gasoline price rises, move downward along bicycle demand curve.D) Gasoline price rises, move upward along bicycle demand curve.

Answer 1

Answer: A

Explanation:

A complementary good is a product that is used together with another product. Without its complement, such a good will have little value. When there is increase in the price of a particular product, the demand of its complement reduces because consumers may not be able to use the complement on its own.

Complements have negative cross elasticity of demand i.e there is increase in the demand for a product when the price of its complement reduces. If bicycles and gasoline are complements, an increase in tax on gasoline will have a negative effect on the demand for bicycle. Due to the price increase of gasoline, less people will demand for bicycle. The initial change that will occur as a result of this is that as there is a price increase for gasoline, there will be a leftward shift in the demand for bicycle. This implies that less bicycle will be demanded for.