Hotdogs and hotdogs buns are complementary goods. We observe that the equilibrium price of hotdogs has...

Hotdogs and hotdogs buns are complementary goods. We observe that the equilibrium price of hotdogs has risen, but the equilibrium quantity of hotdogs buns has fallen. What could cause such association – a fall in the price of flour or a fall in the price of meat? Illustrate and explain your answer.

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Expert Solution

Hotdogs and Hotdog buns are complementary goods - that is goods consumed together. Such goods have negative cross price elasticity of demand that is, an increase in price of hotdogs would result in a decrease in the quantity of hotdog buns.

Hotdogs are made from hotdog buns. Hotdogs cannot be made without the buns. So, if the price of the hotdog has increased, quantity demanded for hotdogs would reduce and for buns too would reduce. A fall in price of flour would reduce the cost of production of buns and hence their price and would increase the quantity demanded for both. Similarly, a fall in price of meat, would reduce the price of hotdogs, increase the quantity of both. Since, both the causes are increasing the quantity of both the goods. But, we can view it as an increase in the price of meat that would increase the cost of hotdogs and hence increase the prices leading to a fall in the quantity of buns since they are complementary goods.

Rahul Sunny answered 2 weeks ago

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