Question

• The price elasticity of demand is |-2|

• The income elasticity of demand is -1.5

• The cross-price elasticity of demand between your good and a related good is -3.5

a. Describe what would happen to total revenue for your good if you raised your price by 10 %

b. Describe what would happen to total revenue for your good if a recession lowered incomes by 10%

c. Describe what would happen to total revenue for your good if the price of the related good fell by 10%

Answer 1

(a) % change in total revenue = % change in price + % change in quantity

% change in quantity = price elasticity of demand* % change in price

= -2*10

= -20%

=> % change in total revenue = 10 - 20 = -10%

(b) % change in quantity = income elasticity of demand * % change in income

= -1.5*-10 = 15%

=> % change in total revenue = 0 + 15 = 15%

(c) % change in quantity = cross price elasticity of demand * % change in price of related goods

= -3.5*-10 = 35%

=> % change in total revenue = 0 + 35 = 35%