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Composite goods

  • Thread starter Bipolarity
  • Start date
  • #1
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1

Homework Statement



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.


Homework Equations


Laws of supply and demand


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
 

Answers and Replies

  • #2
Borek
Mentor
28,441
2,835
Looks logical.
 

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