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Buyers consider gasoline and SUV to be complements. If gasoline price increases, what would you expect...

Buyers consider gasoline and SUV to be complements. If gasoline price increases, what would you expect to occur in the SUV market? a) demand would raise and price of SUV falls b) demand would fall and price of SUV falls c) demand would fall and price of SUV raises d) demand would raise and price of SUV stays the same

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Answer #1

In the above curve, DD and SS curves represent demand and supply curve respectively. Equilibrium price is shown by P and equilibrium quantity is shown by Q.

In this case gasoline is a complementary product. Rise in price of gasoline would make demand curve to shift towards left. New demand curve is shown by D'D'. Supply curve remains unchanged. New equilibrium price is P' and new equilibrium quantity is Q'

Clearly it is evident that new equilibrium price is P' less than the earlier equilibrium price. New equilibrium quantity is less than the earlier equilibrium quantity, Extent of changes depends upon the cross price elasticity of demand between gasoline and SUV.

So,

Correct option is

b) Demand would fall and price of SUV falls.

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