Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline market
a. Decreases.
b. Is unchanged.
c. Increases.
d. May increase, decrease, or remain unchanged.
The correct answer and explanation is :
The correct answer is:
a. Decreases.
Explanation:
Motor oil and gasoline are complementary goods, meaning they are used together. When the price of motor oil increases, it becomes more expensive for consumers to maintain and operate their vehicles. As a result, some consumers may reduce their overall driving, leading to a decrease in the demand for gasoline.
In economic terms, when demand decreases, the demand curve for gasoline shifts to the left. This shift causes the equilibrium price and quantity of gasoline to decrease. Since consumer surplus is the area between the demand curve and the price level, a lower price and lower quantity result in a reduction in consumer surplus in the gasoline market.
Consumer surplus is defined as the difference between the maximum price consumers are willing to pay and the actual market price. When demand decreases due to the higher price of motor oil, fewer consumers buy gasoline, and those who do may pay a slightly lower price, but the reduction in total quantity purchased outweighs this effect, leading to an overall decrease in consumer surplus.
In summary, the increase in the price of motor oil reduces demand for gasoline, leading to lower gasoline prices and lower quantities sold. The net effect is a decrease in consumer surplus in the gasoline market.