Question

A firm produces and sells two goods, A and B. Good A is known to have many close substitutes; good B makes up a significant portion of most families' budgets. A price increase for each good would most likely cause total revenues from good A to:
a. Increase and total revenues from good B to decrease
b. Increase and total revenues from good B to increase
c. Decrease and total revenues from good B to increase
d. Decrease and total revenues from good B to decrease

Answer 1

Answer:

d. Decrease and total revenues from good B to decrease

Explanation:

Goods that have many substitutes and goods that makes up a significant portion of most families' budgets usually have an elastic demand.

Elastic demand means quantity demanded is sensitive to changes in price.

A good with many close substitute can easily be replaced because it has many goods that are similar to it.

If the price of the good with many close substitutes is increased, consumers would reduce qunatity demanded of the good and begin to demand for more of its many close substitutes. As a result, total revenue of seller of the good with many substitutes would fall.

A good that takes up a significant amount of a familys budget means that it cost the family a lot to acquire the good. If price of this good is increased, the family would be sensitive to the price increase and reduce their quantity demanded. As a result, the total revenue of the seller would fall.

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