Question

A, B and C are three commodities, where A and B are complementary, whereas A and C are substitute goods. Then what will be the effect on demand if the price of commodity A increases?

• A. Demand of all the commodities A, B and C will fall
• B. Demand of commodities A and B will fall, whereas demand of C will rise
• C. Demand of commodities A and C will fall, whereas demand of B will rise
• D. Demand of commodities B and C will fall, whereas demand of A will rise

Hint:

When the price of a complementary good increases, the demand for both the good and its complement decreases. However, for substitute goods, an increase in the price of one leads to an increase in the demand for the other.

Answer 1

The Correct Option is B

Step 1: Understanding Complementary and Substitute Goods:
- Complementary goods: These are goods that are consumed together. For example, A and B are complementary goods, so an increase in the price of A will lead to a decrease in the demand for both A and B.
- Substitute goods: These are goods that can replace each other. If the price of A increases, people may switch to C, which is a substitute for A, leading to an increase in the demand for C.
Step 2: Analyzing the Effect on Demand:
- When the price of A increases, the demand for both A and its complementary good B will fall, as consumers will buy less of both.
- However, since A and C are substitutes, an increase in the price of A will likely cause an increase in the demand for C as consumers switch to it.
Step 3: Conclusion and Answer:
The correct answer is (B) because the increase in the price of A leads to a fall in the demand for A and B, and an increase in the demand for the substitute good C.