Assume that goods X and Y are substitutes and are produced in perfectly competitive markets.If there is a decrease in the supply of good X,which of the following will happen in the market for good Y in the long run?

Question

Quizplus · Accepted Answer

Since X and Y are substitutes, a decrease in the supply of X will increase the demand for Y. This will cause an increase in the price of Y in the short run, leading to higher profits for existing firms. However, in the long run, this will attract new firms to enter the market for Y, increasing its supply and causing the price to fall back down to the original level. Therefore, firms will enter, causing market price to fall.

Assume That Goods X and Y Are Substitutes and Are