An increase in the price of Product X leads to a decrease in demand for Product
ID: 1134924 • Letter: A
Question
An increase in the price of Product X leads to a decrease in demand for Product Y. The price increase also increases the demand for Product Z, a related good. Discuss the relationship between these products.An increase in the price of Product X leads to a decrease in demand for Product Y. The price increase also increases the demand for Product Z, a related good. Discuss the relationship between these products.
An increase in the price of Product X leads to a decrease in demand for Product Y. The price increase also increases the demand for Product Z, a related good. Discuss the relationship between these products.
Explanation / Answer
Case 1: An increase in the price of Product X leads to a decrease in demand for Product Y.
Answer: Complementary Goods.
Explanation: In the case of complementary goods, both the goods are used together. For example, gasoline and car are complementary goods. In the case of complementary goods, if the price of one good is increased, the demand for another good decrease.
Case 2: The price increase also increases the demand for Product Z.
Answer: Substitute Goods.
Explanation: In the case of substitute goods, one good can be replaced by another good. For example, Coke and Pepsi are substitute goods. In the case of substitute goods, if the price of one good is increased, the demand for another good also increases. For example, if the price of Coke increases, people would prefer Pepsi and the demand for Pepsi would also increase.