Question

The Toyota Prius is a​ gasoline-electric hybrid car that gets 54 miles to the gallon. An article in the Wall Street Journal notes that sales of the Prius have been hurt by low gasoline prices and​ that: "Americans are now more likely to trade in a hybrid or an electric vehicle for an​ SUV...."

Does the article indicate that​ gasoline-powered cars and gasoline are substitutes or​ complements? Briefly explain.

A.

​Substitutes, because the more consumers buy of one​ good, the more they will buy of the other good.

B.

​Substitutes, because the more consumers buy of one​ good, the less they will buy of the other good.

C.

​Complements, because they are used for the same purpose.

D.

​Complements, because they are used together.

Does it indicate that​ gasoline-powered cars and hybrids are substitutes or​ complements?

A.

​Complements, because they are used for the same purpose.

B.

​Substitutes, because the more consumers buy of one​ good, the less they will buy of the other good.

C.

​Substitutes, because the more consumers buy of one​ good, the more they will buy of the other good.

D.

​Complements, because they are used together.

Answer 1

1. Option D.

• It is given that American's are more likely to trade in a hybrid or an electric car as the sales of pirus have been hurt by low gasoline Price's.
• As indicated by the article, both the gasoline powered cars and gasoline are complement's because they are used together.
• This is because the fall in the price of gasoline causes a decrease in the supply of gasoline powered cars.

2. Option B.

• This indicates that gasoline powered cars and hybrid's are substitutes of each other.
• This is because, when consumer's buy one good, they will buy less of the other good.
• When the price of hybrid car's rise, then the consumer's buy gasoline powered cars more than the hybrids due to the positive cross elasticity of demand between the two goods.