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Homework Help: Composite goods

  1. Jul 1, 2012 #1
    1. The problem statement, all variables and given/known data

    Suppose that cotton is used to produce only two products, pillows and clothes. If the demand for pillows increases, what will happen to the price of clothes? Explain your answer. Assume that the laws of supply and demand hold.


    2. Relevant equations
    Laws of supply and demand


    3. The attempt at a solution
    Since pillow's demand increases, its price increases, which makes it profitable for pillow suppliers to raise output. The raise in output is equivalent to an increased demand for cotton, since cotton is an input for pillow production.

    The increased demand for cotton is reflected in an increase in its price, which is partially borne by clothes manufacturers in the form of increased costs. These increased costs force clothing manufacturers to reduce supply, causing the price of clothes to increase.

    Please tell me if I am correct.

    BiP
     
  2. jcsd
  3. Jul 1, 2012 #2

    Borek

    User Avatar

    Staff: Mentor

    Looks logical.
     
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