Lesson 1.2 Exercise Questions
The following exercise questions are for self-study (nongraded). They are adapted from Chapter 2 of Microeconomics by Pindyck and Rubinfeld (2017). Please try to solve the questions by yourself after completing all required readings. Then select 
to see the correct answer and explanation.
1. Which of the following combinations of goods are complements and which are substitutes? Can they be either in different circumstances? Discuss.
- tennis balls and tennis rackets
- a plane trip and a train trip to the same destination
- bacon and eggs
Answer
- Because both tennis balls and a tennis racket are needed to play tennis, they are complements.
- They are substitutes for one another.
- Bacon and eggs are often eaten together and are complementary goods in that case.
2. Suppose that a consumer spends a fixed amount of income per month on the following pairs of goods. If the price of one of the goods increases, explain the effect on the quantity demanded of each of the goods. In each pair, which are likely to be complements and which are likely to be substitutes?
- tortilla chips and salsa
- tortilla chips and potato chips
- travel by bus and travel by subway
Answer
- When the price of tortilla chips increases, the consumer will demand fewer tortilla chips. Because tortilla chips and salsa are complements, the demand for salsa will drop (D shifts to the left), and the consumer will demand less salsa.
- When the price of tortilla chips increases, the consumer will demand fewer tortilla chips. Since tortilla chips and potato chips are substitutes, the demand for potato chips will increase (D shifts to the right), and the consumer will demand more potato chips.
- When the price of bus travel increases, the amount of bus travel demanded will fall, and the demand for subway rides will rise because travel by bus and subway are generally substitutes. The D curve for the subway shifts to the right.
3. Which of the following events would cause a movement along the demand curve for U.S.-produced clothing, and which would cause a shift in the demand curve?
- the removal of quotas on the importation of foreign clothes
- an increase in the income of U.S. citizens
- a cut in the industry's costs of producing domestic clothes that is passed on to the market in the form of lower prices
Answer
- Lower trade quotas allow U.S. consumers to buy more foreign clothing. Given that foreign goods are substitutes for domestically produced goods, lower quotas will lead to a cut in demand (a shift to the left) for U.S.-produced clothes.
- As income gets higher, expenditures on normal goods, such as clothing, rise. This leads the D curve to shift to the right.
- Lower costs shift the S curve to the right. The price falls and quantity demanded increases. This is a movement along the demand curve.
