Question

Good A and Good B are substitutes in production, what happens to P* and Q* of Good B if the price of Good A increases?

a) P* decreases, Q* decreases
b) P* increases, Q* decreases
c) P* decreases, Q* increases
d) P* increases, Q* increases

Answer 1

If the price of good A increases and it is a substitute for good B, both the price and quantity of good B are expected to increase as consumers will shift their demand towards good B. In terms of the question's options, the correct answer would be d) P* increases, Q* increases.

Step-by-step explanation:

If good A and good B are substitutes in production, and there is an increase in the price of good A, the expected outcome is that the price (P*) and quantity (Q*) of good B will also increase. This is because an increase in the price of good A would make consumers substitute towards good B, increasing its demand. This higher demand for good B typically leads to a higher price as well as a greater quantity sold, assuming that supply can respond to the increased demand.

In terms of the question's options, the correct answer would be d) P* increases, Q* increases. When one substitute's price goes up, consumers shift their purchases to the other substitute, which in turn drives up its price and quantity if the market can sustain it.