How do the prices of related goods, such as complements and substitutes, affect a consumer's willingness to pay for a particular good?

• A. An increase in the price of a complement increases willingness to pay for the good.
• B. A decrease in the price of a substitute increases willingness to pay for the good.
• C. The prices of related goods have no effect on willingness to pay.
• D. An increase in the price of a substitute increases willingness to pay for the good.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of related goods, which include complements and substitutes. Complements are goods that are used together (e.g., coffee and sugar), while substitutes are goods that can replace each other (e.g., tea and coffee).
2. Step 2: Recognize how the price of a complement affects willingness to pay. If the price of a complement increases, the overall cost of using both goods together rises, which typically decreases the consumer's willingness to pay for the original good.
3. Step 3: Analyze how the price of a substitute affects willingness to pay. If the price of a substitute increases, the original good becomes relatively cheaper or more attractive, which usually increases the consumer's willingness to pay for the original good.
4. Step 4: Consider the opposite scenarios: a decrease in the price of a complement tends to increase willingness to pay for the original good, while a decrease in the price of a substitute tends to decrease willingness to pay for the original good.
5. Step 5: Summarize that the correct relationship is: an increase in the price of a substitute increases willingness to pay for the good, because consumers shift their demand towards the relatively cheaper good.