Question

5.3 Do you agree or disagree with each of the following statements? Briefly explain your answers and illustrate each with supply and demand curves. a. The price of a good rises, causing the demand for another good to fall. Therefore, the two goods are substitutes. b. A shift in supply causes the price of a good to fall. The shift must have been an increase in supply. c. During 2009, incomes fell sharply for many Americans. This change would likely lead to a decrease in the prices of both normal and inferior goods. d. Two normal goods cannot be substitutes for each other. e. If demand increases and supply increases at the same time, price will clearly rise. f. The price of good A falls. This causes an increase in the price of good B. Therefore, goods A and B are complements.

Answer 1

5.3

a. If the price of a good rises, then in case of substitutes, the demand for other good will rise as consumers will switch to that good. Hence as the price of a good rises, the demand for another good will rise in case of substitutes goods. Hence the statement is false. In the diagram, suppose X and Y are perfect substitutes of each other. Hence as the price of good X increase, the demand for good Y will increase and the demand curve for good Y will shift rightward from D1 to D2.

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b. If the shift in the supply curve causes a fall in the price level, then the supply curve must have shifted in rightward direction and the rightward shift of the supply curve will cause in increase in the amount of quantity supplied. In the diagram below, as the supply curve of good X shifts rightward from S1 to S2, the equilibrium moves from point A to point B, and the quantity supplied increases from Q1 to Q2. Hence the statement is true.

A pile of t CZ TcScanned with CamScanner Quantity oq x
c. During 2009, incomes fell sharply for many Americans. Now as the level of income falls, people will consume less of a normal good (say X) and as a result of which demand curve for normal goods shift leftward from D1 to D2 and the price will fall from P1 to P2.

Now in case of inferior goods, as the level of income falls, people will consume more of inferior goods. For example, public transportation is an inferior good, thus as the level of income falls, people will use more public transportation and hence the demand for public transportation will rise i.e the demand for inferior good will rise. Thus as the level of income falls, the demand curve for an inferior good(say Y) will shift rightward and hence price of the inferior good will rise from P1 to P2.

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d. The above statement is true. For example, tea and coffee are public substitutes of each other. Hence as the price of coffee increases, people will switch to tea consumption. Here tea is an inferior good and coffee is a normal good. Hence two normal goods cannot be substitutes for each other.