Question

Enlarge image 1) Assume that a product-the plumbus is released to the market that does the work of a widget in 35% of the time with increased efficiency. If the demand for widgets had been at D2 last month, what would an accurate development this month? Price A) The demand for widgets would increase. D B) The demand for widgets would decrease. 9 The demand for plumbuses would increase by 35% Quantity of Widgets D) The demand for plumbuses would not impact widgets. 2) Which of these choices BEST explains the reason for the correct answer in the previous question? A) B) A plumbus is a complementary good used with a widget People will demand more widgets because they know them better A plumbus is a substitute good that takes the place of a widget The supply of widgets will increase because their price will increase D)

Answer 1

1. b. The demand for widget would decrease.

Since plumbus and widgets are substitute goods and the released plumbus is more efficient, people will start substituting widgets with plumbus. As a result the demand for widgets will decrease. If the demand for widgets had been D2 now it will be D1.

2. c. A plumbus is a substitute good that takes the place of a widget.

Since it is mentioned in the question 'plumbus does the work of a widget' it implies they are substitute goods and can be used in place of each other.