Question

Suppose the amount of good X that consumers purchase per period depends upon its price and the price of good Y, and the amount of good Y that consumers purchase per period depends upon its price and the price of good X. If the demand curves for goods X and Y are downward sloping, then which of the following is true?

1) i. if consumers confront a decrease in the price of X, the demand for X will increase
2) ii. if consumers confront a decrease in the price of X, the demand for Y will increase if X and Y are substitutes
3) iii. if consumers confront a decrease in the price of X, the demand for Y will decrease if X and Y are substitutes
4) iv. if consumers confront an increase in the price of X, the demand for Y will increase if X and Y are complement goods
5) v. if consumers confront an increase in the price of X, the demand for Y will decrease if X and Y are complement goods

Answer 1

When the price of good X decreases, demand for X increases and demand for its substitute Y decreases; conversely, if the price of X increases and X and Y are complements, then demand for Y decreases.

Step-by-step explanation:

When considering the impact of price changes on the demand for goods X and Y, we can determine the following relationships:

• If consumers confront a decrease in the price of X, the demand for X will increase, assuming good X has a downward sloping demand curve.
• If consumers confront a decrease in the price of X and X and Y are substitutes, the demand for Y will decrease because consumers will be more likely to purchase the now cheaper good X.
• If consumers confront an increase in the price of X and X and Y are complement goods, the demand for Y will decrease, since the increased price of X means a decreased demand for its complement, Y.
• Changes in expectations about future prices or other factors that affect demand can also shift the demand curve for goods X and Y.