A firm sells two goods (X and Y)that are related in consumption.The estimated demand and cost conditions are: $$\begin{array} { l }
P _ { X } = 20 - 0.1 Q _ { X } - 0.05 Q _ { y } \
P _ { y } = 70 - 0.3 Q _ { y } - 0.1 Q _ { X } \
M C _ { X } = 1 + 0.1 Q _ { X } \
M C _ { y } = 2 + 0.25 Q _ { y }
\end{array}$$ Goods X and Y are
A)complement
B)substitutes
C)independent
D)normal
E)inferior

Question

A firm sells two goods (X and Y)that are related in consumption.The estimated demand and cost conditions are: $$\begin{array} { l } 
P _ { X } = 20 - 0.1 Q _ { X } - 0.05 Q _ { y } \
P _ { y } = 70 - 0.3 Q _ { y } - 0.1 Q _ { X } \
M C _ { X } = 1 + 0.1 Q _ { X } \
M C _ { y } = 2 + 0.25 Q _ { y }
\end{array}$$ Goods X and Y are
A)complement
B)substitutes
C)independent
D)normal
E)inferior

Quizplus · Accepted Answer

Goods X and Y are substitutes because when the price of good X increases, the demand for good Y increases and vice versa. This is reflected in the negative cross-price elasticity of demand between the two goods (-0.05). Therefore, the firm should consider the prices of both goods when making production and pricing decisions. Specifically, if the firm increases the price of good X, it will likely lead to an increase in the demand for good Y, which could potentially offset the decrease in demand for good X. The firm should also take into account their respective marginal costs when setting prices.

A Firm Sells Two Goods (X and Y)that Are Related