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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

A fall in the price of petrol leads to a rise in demand for large cars. Which statement describes the relationship between the two goods and the result in the car market?

Petrol and large cars are complements, so a fall in the petrol price raises demand for cars at every car price. This is a rightward shift of the car demand curve, not a movement along it.

  1. AThey are substitutes; the car demand curve shifts left
  2. BThey are complements; there is a movement down the car demand curve
  3. CThey are complements; the car demand curve shifts rightCorrect
  4. DThey are substitutes; there is a movement down the car supply curve
  5. They are independent goods; the car market is unaffected

Explanation

Cheaper petrol lowers the running cost of cars, so demand for cars rises at every car price. This is positive demand response to a fall in another good's price, which means negative cross-price elasticity: complements. The change is in a non-price determinant, so the demand curve shifts right.

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