Question:
Suppose good X and good Y are substitutes. What will be the effect on the equilibrium price and quantity of good X of an increase in the supply of good Y?
(1) Equilibrium Price: increases; Equilibrium Quantity: decreases
(2) Equilibrium Price: decreases; Equilibrium Quantity: decreases
(3) Equilibrium Price: increases; Equilibrium Quantity: increases
(4) Equilibrium Price: decreases; Equilibrium Quantity: increases
(5) Equilibrium Price: increases; Equilibrium Quantity: unchanged
Correct Answer:
(2)
Answer Explanation:
An increase in the supply of Y lowers the price of Y. Since X and Y are substitutes, consumers switch to buying the cheaper Y, causing the demand for X to decrease. A decrease in demand leads to a lower price and lower quantity for X.
Topic: Demand & Supply Year: 2024
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