1) If the price of a complement increases, what happens to equilibrium price and
ID: 1179267 • Letter: 1
Question
1) If the price of a complement increases, what happens to equilibrium price and quantity of the orginal good?
a) price increases, quantity increases
b) prince increases, quantity decreases
c) price decreases, quantity decreases
d) price decreases, quantity increases
e) none of the above
2) If the price of a substitute increases, what happens to equilibrium price and quantity of the original good?
a) price increases, quantity increases
b)price increases, quantity decreases
c) price decreases, quantity decreases
d) price decreases, quantity increases
e) none of the above
3) If the price of an input increases, what happens to equilibrium price and quantity of the original good?
a) price increases, quantity increases
b) price increases, quantity decreases
c) price decreases, quantity decreases
d) price decreases, quantity increases
e) none of the above
4) If technology increases for a substitute good, what happens to equilibrium price and quantity of the original good?
a) price increases, quantity increases
b) price increases, quantity decreases
c) price decreases, quantity decreases
d) price decreases, quantity increases
e) none of the above
5) If there is a freeze and the other farmers lost part of your corn crop, what happens to equilibrium price and quantity of corn in the corn market?
a) price increases, quantity increases
b) price increases, quantity decreases
c) price decreases, quantity decreases
d) price decreases, quantity increases
e) none of the above
Explanation / Answer
1-(c), the demand for complementary good will decrease (because of price rise). Hence, the demand for original good will decrease, which will result in decrease in equilibrium price.
2-(a) Increase in price of substitute good will result in decrease in demand for substitute good. Thus, the demand for original good will increase which will result in increase in equilibrium price.
3-(b) Increase in input cost will result in decrease in supply. Thus, the quantity produced will decrease so the equilibrium price will increase. Thus, the net effect will be higher price and reduction in demand.
4-(c) Technology increase will lead to increase in supply of substitute good. Thus, the demand for original good will decrease with a decrease in equilibrium price.
5-(b) So a decrease in supply of corn will result in decrease in quantity with an increase in equilibrium price.
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