Firm A producing one good acquires another firm B producing another good.Price elasticity of demand for Firm A's good is -1.8 and Firm's B is -1.8.Holding other things constant and assuming both goods are substitutes,the acquiring firm should
A)Raise prices on both goods with a larger increase in Firm A's good
B)Raise prices on both goods with a larger increase in Firm B's good
C)Raise prices on both goods by the same amount
D)Lower prices on both goods

Question

Quizplus · Accepted Answer

Since the goods are substitutes, raising prices on both goods will increase demand for both goods. However, since the price elasticity of demand for Firm A's good is greater than that of Firm B's good, raising prices on Firm A's good will have a larger impact on demand than raising prices on Firm B's good. Therefore, the acquiring firm should raise prices on both goods by the same amount.

Firm a Producing One Good Acquires Another Firm B Producing