If in the automobile markets we know that two SUV brands, Z and X, are substitutes....

If in the automobile markets we know that two SUV brands, Z and X, are substitutes. Suppose that the supply of X decreases and, at the same time, the supply of the Z increases. Other things being equal, what would be the expectations for the change in the equilibrium quantities at the two markets?

Question 16 options:

	The equilibrium quantity of Z will increase and the equilibrium quantity of X will remain the same.
	The equilibrium quantity of Z will increase and the equilibrium quantity of X will decrease.
	The equilibrium quantity of X will increase and the equilibrium quantity of Z will decrease.
	The equilibrium quantity of X will increase and the equilibrium quantity of Z will remain the same.

Expert Solution

As we know substitute goods are those goods which can be used in place of one another . Here we have two substitute goods , Z and X . Now if the supply of x decreases, this means that in the market demand for x exceeds it's supply . This will lead to rise in the prices of good . So now due to higher prices , consumer starts to demand less X , as it's cheaper substitute Z is avaliable for the consumer . So consumer starts buying Z instead of X as Z is more cheaper to them and X and Z are substitute of each other . Now we know at a same time supply of Z also rises , so simultanous rise in demand and supply will lead to rise in equilibrium quantity for Z , and equilibrium quantity of X will fall due to shifting of it's customer base towards X .

Hence (B) part is a correct answer

Rahul Sunny answered 2 years ago

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