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.

Question

Quizplus · Accepted Answer

Good A has many close substitutes, so a price increase is likely to cause consumers to switch to those substitutes, reducing demand for good A and decreasing its total revenue. Good B makes up a significant portion of most families' budgets, so a price increase for it is likely to reduce demand for it, leading to a decrease in total revenue for good B as well. Therefore, total revenues from both goods would decrease if prices were increased. Therefore, the best choice is D.

A Firm Produces and Sells Two Goods, a and B