Chapter 5: Problem 11

If the rise in the price of service A leads to a fall in the price of service \(B\), we may conclude that __________. (LO2) a) services A and B are substitutes b) services \(A\) and \(B\) are complements c) services A and B are neither substitutes nor complements

Short Answer

Expert verified

b) services A and B are complements

Step by step solution

Understand the information provided

The information states that when the price of service A increases, the price of service B decreases. We will use this information to see which option among a, b, and c accurately describes their relationship.

Analyze Option a)

Option a) states that services A and B are substitutes. In economics, substitute goods are goods that can be used in place of one another. When the price of one good (such as service A) increases, the demand for its substitute good (such as service B) would typically increase as well, leading to an increase in the price of the substitute good. However, in this case, when the price of service A increases, the price of service B decreases. Therefore, services A and B are not substitutes.

Analyze Option b)

Option b) states that services A and B are complements. In economics, complementary goods are goods that are used together or have a positive relationship in their demands. When the price of one good (such as service A) increases, the demand for its complementary good (such as service B) would typically decrease, leading to a decrease in the price of the complementary good. In this case, when the price of service A increases, the price of service B decreases. This scenario matches the definition of complementary goods. Therefore, services A and B are complements.

Analyze Option c)

Option c) states that services A and B are neither substitutes nor complements. Based on our analysis in steps 2 and 3, we have concluded that services A and B are complements. Therefore, this option is not correct.

Choose the correct option

Based on our analysis of the given information and options, we conclude that services A and B are complements. Thus, the correct answer is option b).

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