Consider the following statements : Other things remaining unchanged, market demand for a good might increase if 1. price of its substitute increases 2. price of its complement increases 3. the good is an inferior good and income of the consumers increases 4. its price falls Which of the above statements are correct?
- (a) 1 and 4 only ✓ UPSC's answer
- (b) 2, 3 and 4
- (c) 1, 3 and 4
- (d) 1, 2 and 3
Why the answer is (a)
• Statement 1 is correct: if a substitute (e.g. coffee for tea) becomes dearer, consumers switch to the good, raising its demand.
• Statement 4 is correct: a fall in the good's own price increases the quantity demanded along the demand curve.
• Statement 2 is wrong: if a complement (e.g. petrol for cars) becomes dearer, demand for the good falls.
• Statement 3 is wrong: for an inferior good, demand falls as income rises, since consumers move to better substitutes.
• Hence 1 and 4 only, option (a).
Why the other options are wrong
- (b) 2, 3 and 4
- Statements 2 and 3 are wrong: dearer complements and higher income (for inferior goods) reduce demand.
- (c) 1, 3 and 4
- Statement 3 is wrong: inferior-good demand falls with rising income.
- (d) 1, 2 and 3
- Statements 2 and 3 are wrong; statement 4 is correct.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2021, held on 10 October 2021. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.