Answer:
Explanation:
a. QXd = 1,200 – 3PX – 0.1PZ
Pz = $300 and Px = $140, plugging the values, we get,
Qx = 1200 – 3*140 – 0.1*300.
Qx = 750 units.
Elasticity of demand = \deltaQx/\deltaPx * Px/Qx.
\deltaQx/\deltaPx = -3.
E = -3 * 140/750.
E = -0.56
The elasticity of demand is INELASTIC because the absolute value of elasticity is less than one. If the firm charges a price below $140it might lose out in revenue because the percentage change in demand is less than the price.
b. Px = $240, substituting this into the equation we get
Qx = 1200 – 3*240 – 0.1*300
Qx = 450 units.
E = -3 * 240/450.
E = -1.6
The demand is elastic because the absolute value is less than one. If the firm charges a price above $240 it might lose out on its revenue because the percent change in demand is more than the price.
c. Cross price elasticity of demand Es = \deltaQx/\deltaPz * Pz/Qx.
\deltaQx/\deltaPz = -0.1
Es = -0.1 * 300/750.
Es = -0.04
The goods are complements of each other. As the price of one increases, the demand for other would fall, and vice-versa is true.
