Question

Suppose the own price elasticity of demand for the products of an industry is (-0.7), and the Rothschild Index is 0.15. What happens to the demand of a representative firm in this industry, if its price increases by 1%?

Answer 1

Rothschild index = Elasticity of demand for the product by total market / Elasticity of demand for the product by 1 firm.

0.15 = -0.7/Elasticity of demand for the product by 1 firm.

Elasticity of demand for the product by 1 firm = -0.7/0.15 = -4.66

We know that elasticity of demand faced by 1 firm = % change in Qd/% change in p

-4.66 = % change in Qd/1%

% change in Qd = -4.66%

Hence the quantity demanded of a representative firm in this industry falls by 4.66%, if its price increases by 1%