Question

You are the manager of a firm that receives revenues of $40,000 per year from product X and $80,000 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 -1.7.
How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 1 percent?

Answer 1

Answer:

The price elasticity of product x is -2 which suggests a negative co relation between price and demand. Also it suggests that with a one percent change in price the demand will change 2 percent in the opposite direction. So if the price of x is increased by one percent its demand will fall by 2 percent, which means a net decrease of 1(2-1) percent in revenue. 40,000*0.01=400

A negative cross elasticity suggests that the two goods are complementary and increasing the price of one good will lower the demand of the other one. SO in this case a one percent increase in the price of Good x will decrease the demand of good y by 1.7 percent therefore decreasing its revenue by 0.017*80000= 1360

Total Revenue will decrease by 1760 (1360+400)

Explanation: