Question

Suppose that Big-Cat and Fat-Cat are rival cat food brands, and the price of Fat-Cat is reduced. Following this price drop, is there a shortage or a surplus of Big-Cat as the old price of Big-Cat?

		Equilibrium and quantity both decline.
		Equilibrium price declines, and equilibrium quantity rises.
		Equilibrium and quantity both increase.
		Equilibrium prices rise, and equilibrium quantity falls.

Answer 1

1. Given Big cat and Fat cat are substitute goods, so if price of fat cat falls, the demand for it increases and that of Big cat falls.

From the diagram given above , let p1 and q1 be the price and quantity ofBig cat food and D1 and S1 be its demand and supply respectively. Now as its demand falls to D2, the equilibrium falls to E2 and the price and quantity falls to p2 and q2 respectively. Now considering the previous price of Big cat P1, it has a surplus in supply of amount AB.