Question
Consider the following statements Other things remaining unchanged, market demand for a. good might increase if
1. price of its substitute increases
2. price of its complement increases
3. the good is an inferior good and income of the consumers increases
4. its price falls
Which of the above statements are correct?
(a) 1 and 4 only
(b) 2, 3 and 4
(c) 1, 3 and 4
(d) 1, 2 and 3
Answer:
A
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Explanation:
If the price of a substitute for a good increases, it is likely to have a positive impact on the market demand for the good. Consumers may switch from the more expensive substitute to the relatively cheaper good, leading to an increase in its demand. Therefore, statement 1 is correct.
If the price of a complement for a good increases, it is likely to have a negative impact on the market demand for the good. Complementary goods are typically consumed together, so an increase in the price of one would discourage the consumption of the other. Therefore, statement 2 is incorrect.
The statement suggests that the good is an inferior good, which means that as consumers' income increases, they would generally prefer to consume higher-quality goods, leading to a decrease in the demand for the inferior good. Therefore, statement 3 is incorrect.
A decrease in the price of a good can lead to an increase in its market demand. When the price of a good falls, it becomes relatively cheaper compared to other goods, which can attract more consumers and lead to an increase in demand. Therefore, statement 4 is correct.