Question

Two firms exist in a market.

Demand for firm 1’s product is Q₁ = 100 – p₁ + ½ p₂

Demand for firm 2’s product is Q₂ = 100 – p₂ + ½ p₁

What tells an economist that these two products are substitutes for each other?

What tells an economist that these two products are not perfect substitutes?

What model would you recommend using to solve for p₁ and p₂?

Answer 1

Two goods are substitutes of each other , if an increase in price of one good , leads to an increase in Q of the other.

= 0-0+1/2

=1/2

Here , it being positive means that , when price of second good increases , quantity of first good increases.

As , the demand equations for Q1 and Q2 are similar.We , get similar results ..i.e

SO , the two goods are substitues of each other.

For perfect substitutes ,

If P1 > P2 , Q1 = 0

P2 > P1 ,Q2 = 0

P1 =P2 , Q1 = Q2

Clearly , Q1 or Q2 arent equal to 0 , when p1 > p2 or vice versa

The equations can be solved by using simultaneous pricing .

I hope that this helps.If you have any queries , put in in the comments.I will edit/modify my answer accordingly.
Have a nice day :)