Question

Bananas and peanut butter are considered complementary goods because, as everyone knows, the combination of these two items is truly a delight for the senses. If this is true, what would you expect to happen to the equilibrium quantity of bananas bought and sold in the market as the price of peanut butter decreases?

a. It would decrease because of a shift in supply
b. It would decrease because of a shift in demand
c. It would increase because of a shift in supply
d. It would increase because of a shift in demand
e. It would not change because supply and demand effects would cancel each other out

Suppose the market for fish (a normal good) in the U.S. is in equilibrium. Then suppose that the workers in the fishing industry successfully negotiate for a higher wage, while at the same time average household incomes in the U.S. increase dramatically. What will happen to the equilibrium price and quantity in the market for fish?

a. Price will increase, quantity could increase or decrease
b. Price will decrease, quantity could increase or decrease
c. Price and quantity both increase
d. Price and quantity both decrease
e. Price and quantity will both increase

Answer 1

1. The given two changes are the changes in market condition of a particular product due to factors other than the price of the commodity. The demand for a commodity may change due to factors other than own price such as price of related goods, income of consumers, taste and preferences of the consumers and his expectations. Likewise the supply of a commodity may change due to factors other than own price of the commodity such as price of related goods, number of firms in the market, price of factors, state of technology, business expectations and government policy etc.   

Sometimes two or more goods are needed to satisfy a particular want. Such goods which are used together to satisfy a single want is known as complementary goods. The price changes in one good affect not only the demand of the good but also its complementary. The banana and peanut butter are complementary goods. The fall in price of peanut butter not only increase its own demand but the demand for banana also. Thus the demand for banana increases along with the increase in the demand for peanut butter and the quantity of banana bought and sold also increase. The demand curve of the banana shift rightward without any change in its price and its quantity traded also increase.

Answer: d. it would increase because of a shift in demand.

2. The increase in wage of the workers in fishing industry reduces the supply of fish in the U.S fish market. The increase in income of the household increase the demand for fish. The fall in supply of fish due to increased cost and increase in demand for fish due to increased income increases the price of fish in the market. But the equilibrium quantity traded may increase or decrease depending on the whether the change in supply or demand is greater than or less than the other variable. If the increase in demand is greater than the decrease in supply the equilibrium quantity will increase. If the increase in demand is less than the decrease in supply the equilibrium quantity traded will decrease. If both changes in the same amount, there will be no change in equilibrium quantity, but the price increase.

Answer: a. Price will increase, but the quantity could increase or decrease.