Question

You are the manager of a firm that receives revenues of $20,000 per year from product X and $70,000 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 -1.5.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 1 percent?

Instructions: Enter your response rounded to the nearest dollar. Use a negative sign (-) if applicable.

$ 550 Incorrect

Answer 1

Good X current revenue 20000

Good Y current revenue 70000

Own price elasticity of X = -2, so a 1% increase in price of X will result in a 2% reduction in its quantity demanded, which will result in new revenue of: 20000 x (101% X 98%), where 101% is for price and 98% is for quantity

So new revenue = 19796 (a reduction of 204 from previous level of 20000)

Cross price elasticity between X and Y = -1.5, so a 1% increase in price of X will result in a 1.5% reduction in Y's demand, so the new revenue 70000 x 100% x 98.5% (100% is price, since no change to Y's price, and 98.5% is quantity of Y)

so new revenue of Y = 68950 (a reduction of 1050 from 70000)

Total reduction in revenue for the company = 204 + 1050 = 1254