What happens in the market for tennis balls if (1) the price of tennis rackets, a complement for tennis balls, increases and (2) the price of baseballs, a substitute in production, decreases?

• A. Equilibrium price rises, equilibrium quantity ambiguous
• B. Equilibrium price ambiguous, equilibrium quantity falls
• C. Equilibrium price ambiguous, equilibrium quantity rises
• D. Equilibrium price falls, equilibrium quantity ambiguous

Answer: (D)

Verified step by step guidance

1. Identify the two main effects on the market for tennis balls: the increase in the price of tennis rackets (a complement) and the decrease in the price of baseballs (a substitute in production).
2. Analyze the effect of the increase in the price of tennis rackets: As complements, when the price of tennis rackets increases, the demand for tennis balls decreases. This shift in demand will lead to a leftward shift in the demand curve for tennis balls.
3. Consider the effect of the decrease in the price of baseballs: As substitutes in production, a decrease in the price of baseballs makes it more profitable for producers to produce baseballs instead of tennis balls. This will cause a leftward shift in the supply curve for tennis balls as producers allocate more resources to baseball production.
4. Combine the effects on the demand and supply curves: The leftward shift in the demand curve tends to decrease both the equilibrium price and quantity of tennis balls. The leftward shift in the supply curve tends to increase the equilibrium price and decrease the equilibrium quantity.
5. Determine the overall impact on equilibrium: The equilibrium price is likely to fall due to the stronger effect of decreased demand, but the equilibrium quantity is ambiguous because both demand and supply shifts lead to a decrease in quantity, but the magnitude of shifts is uncertain.