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Suppose there are two firms that sell slightly different formulations of a perfectly safe sugar substitute You are the manager of one such firm that produces a product called

Suppose there are two firms that sell slightly different formulations of a perfectly safe sugar substitute. You are the manager of one such firm that produces a product called Ultrasweet. Your competitor produces a product called Sweet and Healthy. Discuss the direct effects of a reduction in the price of Sweet and Healthy, your competitor's product, on a typical consumer's consumption of Ultrasweet. Assume the consumer considers them both normal goods and that they are reasonably close substitutes since they are usually blended into other products like coffee or ice cream. Include in your discussion an assessment of the substitution effect and the income effect on Ultrasweet consumer quantity demanded. Suppose both firms have a ½ price sale. Discuss the direct effects of the price cuts on a typical consumer’s consumption of Ultrasweet. Answer this question in you discussion: Which effect is unchanged in this situation, the substitution effect or the income effect?

Apr 14 2020 View more View Less

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