If knitting needles are a complementary good for yam, what happens in the market for yarn when the price of knitting needles decreases? O The demand for yarm increases, and the supply decreases. O The demand for yarn decreases, and the supply increases. O The demand for yarn increases, and the equilibrium quantity decreases. O The demand for yarn increases, and the equilibrium quantity increases.
Answer:
When the price of a complementary good falls then the demand for the other complementary good rises. As a result, the demand curve shifts to the right, and the equilibrium price and quantity both rise.
Graphical presentation:
According to the above figure, the x-axis measures the quantity of Yarn, and the y-axis measures the price of yarn. D is the demand curve and S is the supply curve of yarn. Initially, the equilibrium occurs at point E. After the fall in the price of knitting needles, the demand for yarn rises, and the demand curve of yarn shifts to the right from D to D1. As a result, the new equilibrium occurs at point E1. The equilibrium quantity increases from Q to Q1.
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