Assume the price of product A increases from $1 to $1.50, while the pr

Assume the price of product A increases from $1 to $1.50, while the price of competing product B increases from $1.50 to $2.00.

Based on the information, what we can say about the absolute and relative price differences between the two products and the relative attractiveness of the two products to consumers.

ANSWER

Clearly, the absolute difference in the prices of the two products, $0.50, has not changed. The relative price difference, however, has changed. Before the price changes, the the price of product A was two thirds of the price of product B. After the price change, the relative price of product A is three fourths of the price of B. Stated differently, before the price change, the price of B was 50 percent higher than the price of A. After the price changes, the price of B is only 33 percent higher than the price of A. Because of the decrease in the difference in relative prices, product B has become more competitive with product A, all else constant.