Question

Good A and Good B are complements in production. What happens to P* and Q* of Good B if the price of Good A increases?

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

Answer 1

When Good A and Good B are complements in production, an increase in the price of Good A typically leads to increased production of Good A and its complement, Good B. As a result, the quantity supplied of Good B rises. With constant demand for Good B, its price is expected to fall, so P* decreases and Q* increases.

Step-by-step explanation:

If Good A and Good B are complements in production, an increase in the price of Good A generally leads to an increase in its production, assuming producers will want to supply more of Good A as they can get a higher price for it. Since Good A and Good B are complements, it implies that producing more of Good A will also result in producing more of Good B. Therefore, the quantity supplied of Good B (Q*) will also increase.

Now, because these goods are complements in production, the increase in supply will likely lead to a decrease in price (P*) of Good B, unless there is a corresponding increase in demand for Good B that maintains its price. If the demand for Good B remains constant or does not increase as much as the increase in supply, the price is expected to fall. Therefore, the correct answer to what happens to price (P*) and quantity (Q*) of Good B if the price of Good A increases would likely be a) P* decreases, Q* increases.