Question:
Assume that goods X and Y are complements. What will be the effect on the equilibrium price and quantity of good X, if an increase in the supply of good Y, while other things remain unchanged?
(1) Equilibrium price of X: Decrease; Equilibrium quantity of X: Decrease
(2) Equilibrium price of X: Decrease; Equilibrium quantity of X: Increase
(3) Equilibrium price of X: Increase; Equilibrium quantity of X: Decrease
(4) Equilibrium price of X: Increase; Equilibrium quantity of X: Increase
(5) Equilibrium price of X: Decrease; Equilibrium quantity of X: No change
Correct Answer:
(4)
Answer Explanation:
An increase in the supply of Y lowers the price of Y. Since X and Y are complements, a lower price for Y increases the demand for X. An outward shift in the demand for X leads to both a higher equilibrium price and a higher equilibrium quantity for X.
Topic: Market Equilibrium Year: 2022
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