Assume butter and margarine are substitute products. What effect would you expect a decrease in the price of butter might have on the equilibrium in the market for margarine?

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BlackTom AI · Accepted Answer

The question asks about the effect on the margarine market when the price of butter falls, given that butter and margarine are substitute goods. A fall in butter’s price makes butter relatively cheaper, so consumers substitute away from margarine toward butter, reducing demand for margarine. Now let's evaluate each option in turn.

Option a: 'A decrease in demand for margarine would cause both the equilibrium price and quantity traded for margarine to rise.' This is inconsistent: a decrease in demand typically lowers both the equilibrium price and quantity, not raises them. The direction stated (price and quantity rising) does not align with standard demand–supply analysis for a decrease in demand.

Option b: 'An increase in demand for margarine would cause both the equilibrium price and quantity traded for margarine to rise.' If butter’s price falls, consumers shift toward butter, not margarine, so demand for margarine would not increase. Therefore this option describes the wrong causal direction given the substitute relationship between butter and margarine.

Option c: 'A decrease in demand for margarine would cause both the equilibrium price and quantity traded for margarine to fall.' This aligns with the idea that a lower demand shifts the demand curve leftward, reducing both the equilibrium price and the equilibrium quantity in a typical supply-and-demand framework for a competitive market. It correctly captures the effect of substitutes where the cheaper butter reduces the attractiveness of margarine.

Option d: 'An increase in demand for margarine would cause both the equilibrium price and quantity traded for margarine to fall.' An increase in demand would generally raise both price and quantity, not lower them. This option contradicts basic demand theory and the expected substitution effect when butter becomes cheaper.

In summary, the scenario describes a leftward shift in margarine’s demand curve due to consumers substituting toward the cheaper butter, which leads to lower equilibrium price and lower equilibrium quantity for margarine. The only option that matches this outcome is option c.

MUF0061 Economics Unit 1 - Semester 1, 2025 Revision Quiz - Market Equilibrium (12 - 15 minutes)

Assume butter and margarine are substitute products. What effect would you expect a decrease in the price of butter might have on the equilibrium in the market for margarine?

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MUF0061 Economics Unit 1 - Semester 1, 2025 Revision Quiz - Market Equilibrium (12 - 15 minutes)

Assume butter and margarine are substitute products. What effect would you expect a decrease in the price of butter might have on the equilibrium in the market for margarine?

View Explanation

Log in for full answers

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More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

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