Question

After the price of music downloads falls, Phil buys fewer CDs and buys a new MP3 player. For Phil, ___________.a. music downloads, MP3 players, and CDs are all substitutes. b. music downloads and CDs are complements, and MP3 players and CDs are substitutes c. music downloads and CDs are substitutes, and music downloads and MP3 players are complements. d. music downloads, MP3 players, and CDs are all complements.

Answer 1

Answer:

The correct answer is letter "C": music downloads and CDs are substitutes, and music downloads and MP3 players are complements.

Explanation:

Substitute goods or services are competitors. The use of one of them represents the replacement of the other. On the other hand, complementary goods are those that work better together. Typically, the demand in one of them is directly proportional to the demand of the other. It means, if more of product "A" is bought, more of product "B" will be purchased and vice versa.

Thus, for Phil CDs and music downloads are substitutes while music downloads and MP3 players are complements.