Question

In the following question you are asked to determine, other things equal, the effects of a...

In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. An increase in the price of a product that is a complement to X will:

Multiple Choice

  • decrease D, decrease P, and decrease Q.

  • increase D, increase P, and decrease Q.

  • increase D, increase P, and increase Q.

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Answer #1

Ans: decrease D, decrease P, and decrease Q.

Explanation:

The cross-elasticity of demand is negative for the complementary goods. It means when the price of a product increases then the demand for the complementary goods will decrease. Complementary goods are those goods which are used or consumed jointly. So , an increase in the price of a product that is a complement to X will lead decrease in demand for good X . As a result quantity demanded of good X decreases and also decrease in price of good X.

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