Question

When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage stamps and Internet service are therefore:

A) Complementary goods
B) Substitute goods
C) Independent goods
D) Luxury goods

Answer 1

Postage stamps and Internet service are substitute goods because an increase in the price of postage stamps leads to higher demand for Internet service, reflecting a positive cross-price elasticity of demand. The correct answer for teh question is Option (B).

Step-by-step explanation:

When the prices of postage stamps rise, the demand for Internet service increases, holding all other factors constant (ceteris paribus). This scenario indicates that postage stamps and Internet service are substitute goods. Substitute goods have a positive cross-price elasticity of demand, which means that an increase in the price of one good (postage stamps) leads to an increase in the demand for another good (Internet service) as consumers switch to the less expensive alternative. This relationship is contrary to that of complement goods, which have a negative cross-price elasticity of demand; when the price of one increases, the demand for its complement decreases. Given that increasing stamp prices lead to higher demand for Internet services, the correct answer is B) Substitute goods.