Question

Goods X and Y are perfect substitutes. When the market price of good X is? $5/unit, firm F produces 500 units of X. When the price of Y? rises, 100 consumers of Y shift to the consumption of good X. This causes industry analysts to believe that firm F has increased quantity supplied of X by 100 units to meet the higher demand for it. To arrive at this? conclusion, the industry analysts are assuming that

A. each person will now buy more of X than they did prior to the increase in the price of Y.
B. good Y is an inferior good.
C. good X is the only substitute of Y available to them.
D. the law of supply does not hold for good Y.
E. the new buyers of good X? will, on? average, consume one unit each.

Answer 1

C

Step-by-step explanation:

When two goods are perfect substitutes, the smallest price increase in one of them will cause the demand to drop to 0 for the increased price item.

Now, this says that all the quantity of Y goes directly to X, if there were another perfect substitute, say Z, what is not consumed in Y would be divided between X and Z. But in this case all the quantity of Y goes directly to X,