Question

1) A decline in the price of good A causes the demand curve for good B to shift to the left. We can conclude goods A and B are

a. inferior goods

b. substitutes

c. normal goods

d. complements

2) you observe the price of a good rises and the quantity sold decreases. This is the result of

a. a decrease in supply

b. an increase in supply

c. a decrease in demand

d. an increase in demand

3) suppose people buy more of good 1 when the price of good 2 falls. These goods are

a. normal

b. inferior

c. substitutes

d. complements

Answer 1

1. Option B.

• Substitute goods are those goods which have positive cross elasticity of demand.
• This means that when the price of one good rises, the demand for another good also rises. Similarly when the price of one good falls, the demand for another good also falls.
• If the fall in the price of good A causes the demand curve for good B to shift to the left, it means that both A and B are substitutes of each other.

2. Option A.

• When the price of a good rises, the supply decreases as there is an inverse relationship between price and supply.
• Hence if the price of a good rises and the quantity sold decreases, this is the result of a decrease in supply.

3. Option D.

• Complement goods are those goods with negative cross elasticity of demand.
• This means that when the price of any one good Increases, the demand for another good decreases and vice versa.
• Here, if the price of good 2 falls, people tend to buy more of good 1, this shows that both the goods are complements.