Bagels & cream cheese are often eaten together, they are complements

Question

a) We observe that both the equilibrium price of cream cheese and equilibrium quantity of bagels have risen. What could be responsible for this pattern—a fall in the price of flour or a fall in the price of milk? illustrate and explain your answer

b) Suppose instead that equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. what could be responsible for this pattern—a rise in the price of flour or a rise in the price of milk? illustrate and explain your answer

Answer 1

a) If the price of flour falls enough to more than offset the price increase in cream cheese, the equilibrium quantity of bagels will rise. A fall in the price of milk should have reduced the equilibrium price of cream cheese, which is not the case here.

b) As milk increases, cream cheese becomes more expensive, so fewer people buy bagels & cream cheese, which lowers the equilibrium quantity of bagels.

A rise in the price of flour also could reduce the equilibrium quantity of bagels, but cannot explain the rise in the price of cream cheese.