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When two goods are complements, a fall in the price of one good will have what effect on the demand for the other good, other things being equal?
AThe demand for the other good rises
BThe demand for the other good falls
CThe demand for the other good stays fixed
DThe demand for the other good first falls
Answer & Solution
Correct answer: A. The demand for the other good rises
1. Complementary goods are consumed together, such as petrol-driven cars and petrol.
2. There is an inverse relation between the demand for a good and the price of its complement.
3. So a fall in the price of one complement raises the demand for the other.
4. Therefore the demand for the other good rises.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.2_
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