Question

You own goods A and B. You are considering increasing price of good A by 10%. Here is the information you have

Pa = 20

Qa = 1000

if Pa is changed by $1 then Qa will decrease by 100.

Pb = 12

Qb = 750

if Pa is changed by $1 then Qb will increase by 100.

a. What is the own price elasticity?

b. What is the cross price elasticity?

c . What is Total revenue of A before the price change?

d. What is total revenue of A after the price change?

e . What is Total revenue of B before the price change?

f. What is total revenue of B after the price change?

g. What is the change of revenue for A?

h. What is the change or revenue for B?

i. What is change in total revenue for both goods ( part g - part f)

j. Is there an easier way to calculate part i that does not require you to do so much math? Explain what method you could use.

k. Assuming there is a method you could use in part j, what answer would it produce?

l. Which answer is better, part i or part k? Briefly explain.

Answer 1

You are considering increasing price of good A by 10%. Here is the information you have

Pa = 20

Qa = 1000

a) When Pa is changed by $1 and Qa will decrease by 100.

This shows when price increases by 5% i.e. $ 1 then quantity demanded decreases by 10% i.e. 100.

Ed = % change in quantity demanded / % change in price = - 10/5 = - 2

b) When Pa is changed by $1 and Qb will increase by 100.

This shows when price of A increases by 5% then quantity demanded of good B increases by 10%.

Cross price Ed = % change in quantity demanded of good B / % change in price of good A = 10/5 = 2

c) Total revenue = Price x Quantity = 20 x 1000 = 20,000

d) Total revenue = (20 + 10% of 20) x (1000 - 20% of 1000) = 22 x 800 = 17,600

e) Total revenue of B = P x Q = 12 x 750 = 9000