If firm sales (revenue) is increasing but costs are increasing faster (i. e. MR < MC) then how is demand for substitute goods affected? Decrease (shift left)

Increase (shift right)

No effect

Unknown

Incomplete question. Answered from a general economic viewpoint.

Increase (shift right)

Explanation:

Assuming the firm operates in a competitive market environment, then would expect other substitute products to be available.

For example, if the firm sells a popular brand of milk, but then notices its marginal cost of operations is rising faster than its marginal revenue (sales), they may decide to cut to their total output to reduce cost, in other words, reducing the supply of their brand of milk in the market.

However, as consumers find it difficult to get this brand of milk in the market, they may decide to go for other available substitute goods (i.e buying a different brand of milk). Hence, the demand for substitute goods increases (shifts right on the graph.

was my answer wrong?