Answer to Question #197935 in Microeconomics for Abdullah Shahzad

Question

Coke and Pepsi are perfect substitutes. Initially the price of Coke is higher than the price of Pepsi, later on, Coke reduced its price and become equal to the price of Pepsi, then again after that - Coke re-reduced its price and Pepsi became costlier than Coke. Draw the consumer’s demand curve for Coke using the optimal bundles

Answer 1

The perfect substitutes are the goods which cannot be used simultaneously and can only be used in place of each other. The perfect complements would result in the cross elasticity of demand to be positive and higher than 1.

The perfect substitutes in the market are the goods which are used in place of each other. The demand curve would have several kinks which represent the change in consumer pattern in their

The C and P are close substitutes which can be used in place of each other. The C and P would result in the demand curve being the segment AB when the consumer buys only P as the price of C higher than price of P.

After that when the price of C and P would be equal the consumer would be indifferent between C or P thus would choose any point on the line BC and finally when the price of P rises the consumer buys only C which would be the line CD.The total demand curve for the substitutes C and P are represented by the line ABCD.