Circle the appropriate word or phrase in each of the italicized groups. Recently the price of...

Circle the appropriate word or phrase in each of the italicized groups. Recently the price of good A doubled. This resulted in the quantity of good B sold having a minimal (+5%) increase and the price of good B going up substantially (+50%). This suggests that goods A and B are [[ complimentary goods / substitute goods / luxury goods]]. And that, prior to the increase in good A’s price, production of good B was [[below capacity / at or above capacity ]]. It also suggests that, at its current range, the price elasticity of supply for good B is [[ zero / between zero and one / one / greater than one.]]

Expert Solution

As we can see that price of good A got doubled. This resulted in the quantity of good B sold having a minimal of 5% increase and the price of good B going up substantially by 50%.

This suggests that goods A and B are substitute goods.

Let's understand what are substitute goods?

Substitute Goods: These are the goods that can be alternatively used for the same purpose.

So as we can see above that increase in price of good A resulted in increase in quantity sold and price of good B, they are substitute goods.

It can be further understood by following graph:

We can say that before increase in the price of good A, production of good B was at or above capacity as they instantly were able to supply 5% more of previous supply.

It also suggests that at its current range, the price elasticity of supply for good B is inelastic i.e., between zero and one.

We can calculate price elasticity of supply by following formula:

Price elasticity of supply = Change in Quantity Supplied/ Change in Price

= 5/50

= 0.1

Thus, price elasticity of supply for good B is inelastic. It can also further understood by the graph given above as increase in price by 50% is resulting in only 5% increase in quantity sold.

Rahul Sunny answered 1 year ago

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