Goods X and Z are close substitutes, and equally priced to begin with. Suppose that the price of good X falls to below the price of good Z, ceteris paribus. As a result: I. The dia... Goods X and Z are close substitutes, and equally priced to begin with. Suppose that the price of good X falls to below the price of good Z, ceteris paribus. As a result: I. The diagrammatical form of the total demand function (D1) for good X shifts outward. II. The diagrammatical form of the total demand function (D1) for good Z shifts inward. III. There is southeast movement along the total demand function (D1) for good X. IV. Answers I and II are correct. Which of the following statements is/are true? A) I only B) II only C) Answers III and IV D) I only E) III only
Understand the Problem
The question is asking about the implications for the total demand functions of goods X and Z when the price of good X falls. It requires understanding of concepts related to demand functions and how they interact when goods are close substitutes.
Answer
D) I only
The final answer is D) I only
Answer for screen readers
The final answer is D) I only
More Information
If goods X and Z are close substitutes and the price of X falls, consumers will demand more of X, shifting its demand curve outward. The demand for Z will decrease, shifting its curve inward.
Tips
A common mistake is forgetting that substitute goods' demands are interrelated; a price change in one affects the other.
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