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 increase

examrobotsa's picture

Submitted by examrobotsa on

Q: (IAS/2021)
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?

question_subject: 

Science

question_exam: 

IAS

stats: 

0,254,135,254,39,53,43

keywords: 

{'market demand': [0, 0, 0, 1], 'substitute increases': [0, 0, 0, 1], 'complement increases': [0, 0, 0, 1], 'inferior good': [0, 0, 0, 2], 'consumers': [0, 0, 0, 1], 'income': [0, 3, 0, 0]}

The correct answer is option 1, which includes statements 1 and 4.

Statement 1 is correct because if the price of a substitute good increases, the demand for the original good may increase as consumers look for cheaper alternatives.

Statement 4 is also correct as, in general, if the price of a good falls, more people are likely to buy it which results in an increase in market demand.

On the other hand, statement 2 is incorrect as if the price of a complement good increases, the demand for the original good might decrease. Complement goods are those that are typically used together - for example, bread and butter. So if the price of butter increases, people may decide to buy less bread.

Statement 3 is also incorrect. Inferior goods are those goods where demand decreases as consumer income increases. For example, people might buy less ramen noodles as their income increases because they can afford a more expensive substitute. So if the good is an inferior good and consumer income increases, the market demand for the good might decrease, not increase.