The law of demand holds m the market for three goods X Y and

The law of demand holds m the market for three goods X, Y, and Z. An increase in the price of X causes an increase in the price of Y. A decrease in the price of X causes a decrease in the demand for Z. Which of the following conclusions is most strongly supported by the information given above? Y and Z are complements Y and Z are inputs in the production of X Z is as substitute for input X in the production of Y The slope of the demand curve for X is zero X and Y are substitutes.

Solution

Answer. The correct option is C.

A decrease in the price of X, if led to decrease in the demand for Z. This means that X is a substitute good for Z. In other words Z and X are substitute goods. A fall in the price of the good X will increase the demand for X, as the consumers will shift away from the commodity Z.

As an increase in the price of X causes an increase in the price of Y shows that X is an input to the production of Y. This is so because an increase in the input will increase the costs of the product and the firm therefore will increase the price of the commodity Y.