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?

Question

BlackTom AI · Accepted Answer

Since butter and margarine are substitutes, a fall in the price of butter makes butter relatively cheaper and consumers switch from margarine to butter, reducing demand for margarine.

1) Relevant knowledge points and concepts
- Substitute goods: when the price of one falls, demand for its substitute falls.
- Demand curve shift: a decrease in demand is a leftward shift of the demand curve.
- Market equilibrium: intersection of demand and supply determines equilibrium price and quantity; a leftward demand shift lowers both equilibrium price and quantity (holding supply unchanged).

2) Step-by-step reasoning with algebraic illustration
Let demand for margarine be Dm = A − B·Pm + C·Pb, where Pm is margarine price, Pb is butter price, B>0, C>0 (positive C because butter is a substitute). Let supply be Sm = D + E·Pm with E>0.
Equilibrium requires Dm = Sm:
A − B·Pm + C·Pb = D + E·Pm.

3) Solve for equilibrium price Pm*
Rearrange:
A + C·Pb − D = (B + E)·Pm
Therefore Pm* = (A + C·Pb − D) / (B + E).

4) Effect of a decrease in Pb (butter price)
If Pb falls, the numerator (A + C·Pb − D) decreases because C·Pb decreases. With denominator constant, Pm* falls. Equilibrium quantity Q* = Sm = D + E·Pm* also falls because Pm* falls and E>0. Thus both equilibrium price and quantity for margarine fall.

5) Why other multiple-choice options are incorrect
- b is wrong: it states price and quantity rise after a decrease in demand, which contradicts demand theory.
- c is wrong: a decrease in butter price does not increase demand for margarine (it decreases it).
- d is wrong: an increase in demand wouldn’t cause price and quantity to fall; it would raise them.

6) Conclusion
Because butter and margarine are substitutes and a lower butter price reduces margarine demand, equilibrium price and quantity for margarine both fall. This confirms answer a.

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?Single choice

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