Question

In: Economics

An increase in the price of ground beef - A. increases the quantity demanded of ground...

An increase in the price of ground beef -

A. increases the quantity demanded of ground beef.

B. decreases the demand for ground beef.

C. increases the demand for chicken, a substitute for ground beef.

I believe that the correct answer is B, but I need to write a big explanation for why its is correct.

Solutions

Expert Solution

Ans: The increase in the price of ground beef will cause the decrease in the demand for ground beef and as well as increase in the demand for chicken, a substitute for ground beef . Both options B and C are correct

Because of the law of demand if all other factors stay constant there is an inverse relationship between the price and the quantity demanded of a good itself; so an increase in the price of ground beef will cause decline in the quantity demanded of ground beef because if all other factors like income, taste and preferences stay constant then increase in the price of ground beef will cause the ecline in demand for ground beef because of diminishing marginal utility which implies that each additional unit of beef will provie less utility than the previous one so consumers will be willing to pay less for each subsequent unit consumed . Thus demand curve is downward sloping implying that there is negative relationship price of agood and its quantity demanded.

Now because chicken is a substitute of ground beef then increase in price of beef will incentivize the consumers to move towards the chicken as chicken is less costly than the beef and they will substitute chicken in place of beef as there is positive relatonship between the price of a good(beef) and the quantity demanded of its substitute(chicken); thus increase in price of beef will ncrease the demand of chicken.


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