Consider the competitive markets for running shoes and gym memberships, two complementary products. Assume that the laws of demand and supply hold in each market. You observe the following facts in the two markets: in the running shoe market both the price and quantity traded fall; and in the gym membership market the price increases and the quantity traded falls. What change could explain these changes?

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BlackTom AI · Accepted Answer

To understand the scenario, we must trace how each option would affect the two markets for running shoes and gym memberships, remembering they are complementary goods: changes in gym demand can influence shoe demand.
Option 1: The cost of rubber, an input into running shoes, increases. A higher input cost would shift the shoe supply curve left (supply decreases), leading to a higher price and lower quantity in the running shoe market. However, the observed pattern is that both price and quantity fall in the shoe market, not rise in price. In the gym market, this change in shoe input costs does not directly explain a higher price and lower quantity for gym memberships, so this option fails to account for the observed gym market behavior and the joint implication across markets.
Option 2: The cost of rubber, an input into running shoes, falls. A lower input cost shifts the shoe supply curve right (supply increases), typically lowering price and increasing quantity in the shoe market. That contradicts the observed fall in both price and quantity for shoes. Since gym prices rise and quantity falls, this option does not coherently explain both markets at once.
Option 3: New computer and security technology allows gyms to operate with fewer staff. Reducing staffing costs would shift the gym supply curve right (supply increases), which would tend to lower gym prices or increase quantities, not raise prices while reducing quantities as observed. Therefore this option does not match the gym market outcome and would not naturally produce the shoe market decline through reduced gym usage.
Option 4: New medical research shows that people that exercise regularly live longer and are happier. If this were true, it could increase demand for gym memberships, potentially raising price and quantity. But the observed gym market outcome is price up and quantity down, which is inconsistent with a straightforward increase in demand. Moreover, the shoe market response would depend on whether gym demand influences shoe demand; the overall pattern would be ambiguous and does not cleanly explain both markets in the given direction.
Option 5: A new workplace safety law requires that all gyms need to have more and better trained staff. This raises gym operating costs, shifting the gym supply curve left, which raises price and reduces quantity in the gym market. Since gyms become more expensive and possibly less attractive, demand for running shoes could decline (fewer gym visits or reduced participation), shifting the shoe demand left and causing lower price and lower quantity in the shoe market. This option coherently explains the observed movements in both markets through linked effects on demand for shoes via gym participation and a supply-driven change in the gym market itself.

BUSS1040 (ND) Quiz 1

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