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Chapter 3: Problem 6

For each of the following pairs of products, briefly explain which are complements, which are substitutes, and which are unrelated. a. New cars and used cars b. Houses and washing machines c. UGG boots and Pepsi's LIFEWTR d. Pepsi's LIFEWTR and Diet Coke

Short Answer

Expert verified
a. Substitute goods - New cars and used cars; d. Substitute goods - Pepsi's LIFEWTR and Diet Coke; b. Complementary goods - Houses and washing machines; c. Unrelated goods - UGG boots and Pepsi's LIFEWTR

Step by step solution

01

Differentiating Substitutes

Substitutes are goods that may replace one another. If the price of one good increases, the demand for its substitute will rise. For example, new cars and used cars serve the same purpose of transportation, so they are substitutes. Similarly, Pepsi's LIFEWTR and Diet Coke are both beverages; if the price of one goes up, consumers may readily switch to the other, therefore they are substitutes.
02

Identifying Complements

Complementary goods have a relationship where the use of one good increases the use of another. Examples include devices and their accessories or various components of a system. For instance, houses and washing machines could be considered complementary. If a person buys or rents a house, they are likely to need a washing machine.
03

Recognizing Unrelated Goods

Unrelated goods neither substitute each other nor do they complement. UGG boots and Pepsi's LIFEWTR could be considered as unrelated. The purchase decision of a pair of boots is not likely to be influenced by the purchase of a bottle of water.

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