If the price of a substitute(Y) of good X increases, what impact does it have on the equilibrium price and quantity of good X?
When the price of a substitute good Y increases, consumers shift their preference to good X as it becomes relatively cheaper. This leads to an increase in demand for good X at each price level, causing the demand curve to shift rightward.
The supply curve of good X remains unchanged as the price of substitute Y does not affect production conditions. With a rightward shift in the demand curve and supply remaining constant, the new equilibrium is established at a point where both equilibrium price and equilibrium quantity of good X increase.
Thus, an increase in the price of a substitute good raises both the equilibrium price and quantity of the concerned good.
Explanation
The textbook context explains how demand curve shifts affect equilibrium. When demand increases (rightward shift), consumers are willing to buy more at each price. The context states that with prices held constant, 'we would expect the demand for the good to increase at each price as a result of which the market demand curve will shift rightward.' When demand shifts rightward with supply unchanged, the equilibrium price rises and quantity increases. This principle applies to substitute goods - when Y becomes expensive, X becomes relatively attractive, increasing X's demand.
Solution Steps
Step 1: Identify that price increase of substitute Y makes good X relatively cheaper for consumers.
Step 2: Conclude that demand for good X increases, shifting the demand curve rightward.
Step 3: Analyze that supply curve remains unchanged as substitute's price doesn't affect production.
Step 4: Determine that rightward demand shift with constant supply leads to higher equilibrium price and quantity.