Question

A company that makes mobile phones introduces a new, faster model that has strong consumer interest. However, the old model is still available. What will most likely happen to the price of the old model, and why?

The price will fall to encourage consumers to continue to purchase it.
The price will rise to encourage the producer to make more old models.
The price will fall to discourage the producer from making more old models.
The price will rise to encourage consumers to buy both models in equal amounts.

Answer 1

The price will fall to encourage consumers to continue to purchase it.

Explanation: The new model reduces demand for the old model (they're substitutes). With excess supply at the old price, the market price falls until demand increases enough to clear the market.