Question

XYZ​ firm, the leading producer of leather goods in its country is planning to expand its business. Industry experts identify Asia as a potential target market. They report that substitute​products, particularly in​ India, are highly priced.​ Darren, the operational​head, feels that exporting their product to India is a good idea. According to​ him, their price advantage alone will ensure good sales.​ However, his​ colleague, Mark, who is also the head of product​ development, feels that Darren is too​ optimistic, and that this venture may not turn out to be as profitable as Darren expects it to be.​Darren's view is based on which of the following​assumptions?A.Imports in India usually exceed exports from the country.B.​XYZ's product is a close substitute for the locally available goods.C.Consumers in India are extremely loyal to national brands.D.India has high import tariffs.E.The quality of the domestically produced substitutes is not as good as​ XYZ's product.

Answer 1

The answer is: B

Step-by-step explanation:

XYZ can produce the leather goods at competitive prices. Since the substitute products in India are highly priced then their pricing advantage could prove lucrative for the India entry decision. Substitute products are products which can be used interchangeably for the same purpose. An example would be a burger from 'McDonalds' versus a burger from 'Burger King', the goods are the same with slight differences in terms of taste, ingredients, price and so on.

Darren suggests that XYZ's pricing advantage will result in significant sales. However, this prediction only holds true if XYZ's product is a close substitute to the locally available products since the only differentiating factor would be the price. In a market with close substitutes, demand is highly elastic (for a small change in price, there is a significant change in quantities of substitute goods demanded). Holding all else constant, the entry of XYZ in India with their leather products priced competitively would lead to an increase in the quantity demanded of XYZ's products.

Answer 2

The answer is: B.) XYZ's product is a close substitute for the locally available goods.

Step-by-step explanation:

A substitute product can be defined as a good a consumer perceives as similar or comparable to another good (e.g. cow and chicken meat). Generally speaking, when the price of one of these goods increases, the demand for its substitute good increases.

In this case, Darren believes that since XYZ´s product is cheaper it should sell better than its competition (close substitute goods).