Question

Consider the market for mobile applications, smartphones, and conventional phones. For each pair, identify whether they are complements or substitutes: Pairs of Goods and Services Mobile applications and smartphones Mobile applications and conventional phones Smartphones and conventional phones Complements Substitutes Suppose a network externality reduces the cost of developing cell phone applications

Answer 1

Ans. complement goods are those goods which are used together that means an increase in the demand of good when the price of other goods decreases. conversely, decreases in the demand of good when the price of other good increases.

substitute goods are those goods which are used in place of each other that means an increase in the demand for goods when the price of other good increases. conversely, demand for good decreases when the price of other good decreases.

1) mobile applications and smartphones are complement goods

2) mobile applications and conventional phones are the substitute goods

3) smartphones and conventional phones are the substitute goods

Diagram 1 when a network externality reduces the cost of developing cell phones applications that lead to an increase in the supply of mobile applications in the market and supply curve shift downward. Equilibrium price decreases from P to P1 and equilibrium quantity of cell phones applications increases from Q to Q1

Diagram 2 Due to an increase in the supply of mobile applications in the market, the demand for conventional phones in the market decreases as mobile applications and conventional phones are substitute goods ( price of cellphone decreases in the market)

In the market for conventional phones, the demand curve shifts inward and at the given supply of conventional phones, equilibrium price decreases from P to P1 and the quantity of conventional mobile decreases from Q to Q1

Diagram 3. Due to an increase in the supply for cell phones applications in the market, Demand for smartphones increases as both goods are complementary goods ( price of cell phone applications decreases ).

In the market of smartphone, the demand curve shifts upward, and at the given supply of the smartphones, equilibrium price increases from P to P1 and equilibrium quantity of smartphones increases from Q to Q1