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Substitute and Complement Goods

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2a. What should you do to maximize profits with respect to prices after you acquire a substitute product. Which prices should you change more?
2b. What should you do to maximize profits with respect to prices after you acquire a complement product?

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2a. For maximizing profit with respect to prices after the acquirement of a substitute product, various ways are possible. An augment in price will consequent in an augment in demand for its relevant substitute products. Therefore, it is obvious that if high substitutability occurs in two goods, the change in demand will be much higher. It implies that maximum profit is only possible, when customer gets quality product. These quality products also make possible to charge higher prices with the consumer (Siddiqui, 2006).

Furthermore, a substitute product is a product, which appears to be dissimilar, but can fulfill the same requirement in respect of another product. I can take a classic example of substitute product tea ...

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1. If the price of this item increases, how would this affect the quantity of the good that you consume?

2. Is the demand for this good price elastic or price inelastic? Justify your classification by talking about the determinants of elasticity as they apply to this product.

3. Say price is on the rise for this product and you are the manager of a store, would you be thrilled to be selling this product? Under what circumstances would you want to own a business that sells this product? In other words, how does an increase in price for this good affect your Total Revenue?

4. Using specific examples, relate the concepts of Cross Elasticity and Income Elasticity to this product.

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