Suppose you observe a decrease in the market price of DVD players. Which of the following might explain why the price of DVD players has been falling?
a. A decrease in the price of Blu-ray players, a high-definition substitute for DVD players
b. A decrease in the price of DVDs, which are a complement to DVD players
c. An increase in the price of gasoline used for transporting DVD players
d. An increase in consumer income, which leads to more people purchasing DVD players Clear my choice
The correct answer and explanation is:
The correct answer is B. A decrease in the price of DVDs, which are a complement to DVD players.
Explanation:
When the price of a complementary good decreases, the demand for the related good tends to increase. In this case, DVDs are complementary to DVD players. A complementary good is one that is often used together with another good, such as how printers are complementary to computers, or DVDs are to DVD players.
If the price of DVDs decreases, more people are likely to buy DVDs because they are now cheaper. Since DVDs can only be used in DVD players, the increased demand for DVDs can also result in higher demand for DVD players. However, if the demand for DVD players increases, producers might find it more profitable to lower the price of DVD players to attract even more consumers. This could explain the observed decrease in the price of DVD players.
Now, let’s look at the other options:
- A. A decrease in the price of Blu-ray players, a high-definition substitute for DVD players: This is less likely to explain the decrease in the price of DVD players because a decrease in the price of Blu-ray players (which are substitutes) would actually lead to a decrease in demand for DVD players. If consumers are shifting towards Blu-ray players, the price of DVD players might actually rise due to lower demand, not fall.
- C. An increase in the price of gasoline used for transporting DVD players: If transportation costs increase, it would typically increase the price of DVD players due to higher production costs. This would not lead to a decrease in the price of DVD players.
- D. An increase in consumer income, which leads to more people purchasing DVD players: While an increase in income could increase the demand for DVD players, it would not necessarily lead to a decrease in price. In fact, increased demand might push prices higher, not lower.
Thus, option B is the most plausible reason for the observed decrease in the price of DVD players.