0
$\begingroup$

A) Oil is inferior good while natural gas is normal good.

B) Both of them are normal good.

C)They are substitute goods and the higher price for oil increased the demand for natural gas.

D)They are substitute goods and the higher price for oil decreased the supply for natural gas.

In my personal opinion, the answer should be C. We can eliminate A and B first as there's no indication of income change. For D think since substitute good refers to the customer side so I think we should also remove D. Is there a better explanation ?

Improve this question
$\endgroup$
  • 1
    $\begingroup$ Yes, a price change in one of two substitute goods will cause a change in demand for that good and its substitute. $\endgroup$ – dismalscience Apr 5 '16 at 13:12
2
$\begingroup$

I think your answer is OK.

  • A doesn't connect prices in any way. In a two-goods economy and given that wealth doesn't change... you may give it some more thought but you need to add extra assumptions.
  • B tells us nothing on why such change would take effect. It may just as well be that oil is more valued.
  • C is the right answer
  • You need more assumptions for D, e.g. why the oil price increased. At least in the really short term, though, supply isn't a factor.
Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.