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. From these facts, we would expect that the demand for Good A would be ______, while that of Good B would be________.

Answer 1

Answer:

The demand for good A will be elastic. Demand for good B will also be elastic.

Explanation:

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.

Since good A has a lot of substitutes an increase in its price will lead to a reduction in its quantity demanded as people will prefer a cheaper substitute. This will make its demand elastic.

Good B makes a significant portion of the families' budgets. So a change in its price will significantly affect the budget of the families. This will make its demand relatively elastic.