The demand curve for a product is given by Qx 1,200 3Px-o1Pz where Pz $300 a. Wh

Question

The demand curve for a product is given by Qx 1,200 3Px-o1Pz where Pz $300 a. What is the own price elasticity of demand when Px F$140? ls demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below $140? Instruction: Round your response to 2 decimal places. own price elasticity: Demand is Click to selec f the firm prices below $140, revenue will: Click to selec b. What is the own price elasticity of demand when PX $240? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price above $240? Instruction: Round your response to 1 decimal place. own price elasticity: Demand is Click to selec f the firm prices above $240, revenue will: Click to selec c. What is the cross-price elasticity of demand between good Xand good Z when PxE $140? Are goods Xand Zsubstitutes or complements? Instruction: Round your response to 2 decimal places. Cross-price elasticity: Goods X and Z are: Click to selec

Explanation / Answer

Qx = 1200 - 3Px - 0.1Pz [Pz = 300]

= 1,170 - 3Px

(a) When Px = 140

Qx = 1,170 - (3 x 140) = 750

And

dQx / dPx = - 3

So, own price elasticity = (dQx / dPx) x (Px / Qx)

= - 3 x 140 / 750 = - 0.56

Since absolute value of elasticity < 1, demand is inelastic.

If firm decreases price below 140, quantity demanded will increase but less than proportionately, So, revenue will decrease.

(b) Px = 240

Qx = 1,170 - (3 x 240) = 450

And

dQx / dPx = - 3

So, own price elasticity = (dQx / dPx) x (Px / Qx)

= - 3 x 240 / 450 = - 1.6

Since absolute value of elasticity > 1, demand is elastic.

If firm increases price above 240, quantity demanded will decrease more than proportionately, So, revenue will decrease.

(c) when Px = 140,

Qx = 750

and dQx / dPz = - 0.1

Cross price elasticity of demand = (dQx / dPz) x (Pz / Qx)

= - 0.1 x 300 / 750 = - 0.04

Since cross elasticity is negative, X & Z are substitutes.

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