You are the manager of a firm that receives revenues of $60,000 per year from pr

Question

You are the manager of a firm that receives revenues of $60,000 per year from product X and $100,000 per year from product Y. The own price elasticity of demand for product X is -2, and the cross-price elasticity of demand between product Y and X is 1.5.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent? You are the manager of a firm that receives revenues of $60,000 per year from product X and $100,000 per year from product Y. The own price elasticity of demand for product X is -2, and the cross-price elasticity of demand between product Y and X is 1.5.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent? You are the manager of a firm that receives revenues of $60,000 per year from product X and $100,000 per year from product Y. The own price elasticity of demand for product X is -2, and the cross-price elasticity of demand between product Y and X is 1.5.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent? You are the manager of a firm that receives revenues of $60,000 per year from product X and $100,000 per year from product Y. The own price elasticity of demand for product X is -2, and the cross-price elasticity of demand between product Y and X is 1.5.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?

Explanation / Answer

Elasticity = % change in QD / % change in P

Own price elasticity of demand of X = -2

Cross price elasticity of demand of X and Y = 1.5

When Px increases by 2%, then going by the formula of elasticity,

QDx will fall by -2(2) = -4%

QDy will increase by 1.5(2) = 3%

New revenue of X = Px.Qx = (1.02Px)(0.96Qx) = 0.9792PxQx = 0.9792(60,000) = $58,752

New revenue of Y = Px.Qy = (1.02Px)(1.03Qy) = 1.0506PxQy = 1.0506(100,000) = $105,060

Thus, revenue of X falls while revenue of Y rises.

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