Question

For each of the following shifts(A,B,C,&D) in the demand curve and associated price change of a complement or substitute item, explain whether the change in the price of the complement or substitute must have been an increase or a decrease.
A. A rise in the demand for a dashboard global-positioning-system device follows a change in the price of automobiles, which are complements.
B. A fall in the demand for e-book readers follows a change in the price of e-books, which are complements.
C. A rise in the demand for tablet devices follows a change in the price of ultrathin laptop computers, which are substitutes.
D. A fall in the demand for physical books follows a change in the price of e-books, which are substitutes.

Answer 1

Answer:

A. Decrease in price of complements

B. Increase in price of complements

C. Increase in price of substitute

D. Decrease in price of substitute

Explanation:

A. A decrease in the price of a good would increase its demand. This will cause the demand for its complements to increase as well, this is because the complements are consumed together.

B. Similarly, the increase in the price of a good would decrease in its demand. Along with it, the demand for its complement will decrease as well because the complements will be consumed together.

C. When the price of a good increases, its demand will decrease. The demand for its substitutes will increase because the consumers will prefer the cheaper substitute.

D. Similarly, the decline in the price of a good will make it cheaper, so its demand will increase. The demand for its substitute will decrease because the consumers will prefer the good that is cheaper.