Answer to Question #307518 in Microeconomics for rubaiya

Question

What is the effect on the price of an audiotape and the quantity of audiotapes sold if:

a The price of a CD rises?

b The price of a Walkman rises?

c Consumers’ incomes increase?

d Workers who make audiotapes get a pay rise?

e The price of a Walkman rises at the same time as the workers who make audiotapes get a pay rise?

Answer 1

a) Increase in the price of CDs means that the CDs will be more expensive than the audiotapes. Audiotapes and CDs are substitute goods, which means that the quantity of audiotapes sold will increase as more people will prefer audiotapes. When this happens, the price of audiotapes will increase since the demand has risen more than its supply.

b) Rise in the price of Walkman will lead to a reduction in price of audiotapes leading to an increase in quantity of audiotapes. This move is done to encourage people to buy audiotapes because by buying audiotapes, they will have no choice but to buy Walkman because they are complementary goods. Therefore, audiotapes cannot be used without Walkman, which means the price are reduced to encourage buying of the expensive Walkman.

c) Increase in consumer income will lead to rise in the demand of audiotapes, which will lead to increase in quantity of the audiotapes. However, it will also lead to rise in price of the audiotapes since consumers are now willing to pay for the product due to an increase in their income.

d) Increase in wages of the audiotape worker will lead to an increase in the price of audiotapes to support the increased wages. It will lead to decrease in quantity demanded by consumers due to increase in price.

e) It will lead to a drastic decrease in quantity demanded of audiotapes and increase in price. This is because increase in price of Walkman will discourage the purchase of audiotapes. Further, increase in wages of the workers means that the price of audiotapes must increase to cater for the wages, also leading to a decrease in quantity demanded for both the audiotapes and Walkman.