Question

The price and quantity of A, an inferior good, sold decreased after a shock to the market. What could explain this change?

A) An increase in price of B (a complementary good for A)

B) An increase in price of C (a substitute good for A)

C) A decrease in the income of A consumers

D) All of the above are correct

E) Both a and c are correct

F) Both a and b are correct

G) Both b and c are correct

H) None of the above are correct

Answer 1

We are told that,

• A is an inferior good. It means that, if the income of consumers of A increases, then the quantity sold of A decreases. Exactly the opposite is stated in option (c)

Option (c) is not correct.

We are also told that,

• The price of A decreased after a shock to the market.

Now, if there is a substitute good C available in the market, then the cross price elasticity between A and C will be positive.

Hence, in option (b), the price of C increases. Then the quantity sold of A increases as they are substitutes. According to the law of demand, it decreases the price of A.

Hence, Option (b) is correct.

Finally, we are told one more thing i.e.

• The quantity of A sold decreases after a shock to the market.

Now, if there is a complementary good B available in the market, then if the quantity of B sold decreases, then the quantity of A sold also decreases.

Hence, in option (a), the price of B increases. Hence, the quantity of B sold decreases. Then the quantity of A sold also decreases as they are complements.

Hence, option (a) is also correct.

Hence, options (a), (b) are correct.

Answer is option (F)