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 considered complementary goods, meaning that they are often consumed together. For example, consumers who own cars may need both motor oil for maintenance and gasoline to fuel the vehicle. The relationship between the two goods is such that when the price of one good changes, it affects the demand for the other.
Now, let’s break this down:
- Impact of an Increase in the Price of Motor Oil:
When the price of motor oil rises, consumers are likely to buy less motor oil. This reduction in demand for motor oil also affects the demand for gasoline because the two are complementary goods. If consumers are buying less motor oil (since it’s now more expensive), they might also reduce their use of gasoline, as they may not be driving as much due to higher car maintenance costs. - Shift in the Gasoline Market:
The decrease in demand for gasoline due to a higher price of motor oil causes the demand curve for gasoline to shift to the left. This means that at every price level, consumers are now purchasing less gasoline. As a result, gasoline sellers will experience a decrease in the quantity of gasoline sold, which in turn leads to a lower price in the gasoline market if the supply curve remains unchanged. - Consumer Surplus in the Gasoline Market:
Consumer surplus refers to the difference between what consumers are willing to pay for a good and what they actually pay. A decrease in demand for gasoline leads to a lower price for gasoline, which might initially sound like a gain for consumers. However, the reduction in the quantity purchased (due to the complementary relationship) leads to a net loss in consumer surplus. Consumers are not benefiting from the same amount of consumption as they would have before the price increase of motor oil.
Thus, in the gasoline market, consumer surplus decreases because the overall quantity of gasoline consumed decreases and the shift in the demand curve reduces the value consumers derive from the gasoline market.