Question

Suppose that goods A and B are close substitutes. If the price of good A decreases, then we would expect an:

a) increase in the demand for A and a decrease in the quantity of B demanded.

b )increase in the demand for A and an increase in the quantity of B demanded.

c) increase in the demand for good A as well as for good B.

d) increase in the quantity of A demanded and a decrease in the demand for B.

Why?

Answer 1

Correct option is (d).

When price of good A decreases, following the law of demand, its quantity demanded increases. Since good B is a substitute, consumers will switch from higher-priced good B to lower-priced good A, which will decrease the demand for good B.

Note that, if a good's own price changes, there is a change in its quantity demanded (movement along demand curve), but if price of a related good changes, there is a change in demand (shift of demand curve).