Gasoline and bicycles are complements in consumption. Suppose we increase the federal gasoline tax to $1 per gallon. What are the initial changes that result from the tax as these markets adjust to a new general equilibrium? A) Gasoline price rises, demand for bicycles shift s leftward. B) Gasoline price rises, demand for bicycles shifts rightward. C) Gasoline price rises, move downward along bicycle demand curve. D) Gasoline price rises, move upward along bicycle demand curve.

Answer: A

Explanation:

A complementary good is a product that is used together with another product. Without its complement, such a good will have little value. When there is increase in the price of a particular product, the demand of its complement reduces because consumers may not be able to use the complement on its own.

Complements have negative cross elasticity of demand i. e there is increase in the demand for a product when the price of its complement reduces. If bicycles and gasoline are complements, an increase in tax on gasoline will have a negative effect on the demand for bicycle. Due to the price increase of gasoline, less people will demand for bicycle. The initial change that will occur as a result of this is that as there is a price increase for gasoline, there will be a leftward shift in the demand for bicycle. This implies that less bicycle will be demanded for.