Homework Answers
Own price elasticity = % Change in quantity demanded of paper books / % Change in price of paper books
-2 = % Change in quantity demanded of paper books / (-4%)
% Change in quantity demanded of paper books = (-2) x (-4)% = 8% (increase)
Let initial price and quantity of paper books be P0 and Q0.
Initial revenue = P0 x Q0 = $400 million
New revenue = (0.96 x P0) x (1.08 x Q0) = (0.96 x 1.08) x (P0 x Q0) = 1.0368 x $400 million = $414.72 million
Increase in revenue = $(414.72 - 400) million = $14.72 million............(1)
Also,
Cross-price elasticity = % Change in quantity demanded of e-books / % Change in price of paper books
-0.3 = % Change in quantity demanded of e-books / (-4%)
% Change in quantity demanded of e-books = (-0.3) x (-4)% = 1.2% (increase)
Let initial price of paper books and quantity of e-books be P0 and Q0.
Initial revenue = P0 x Q0 = $600 million
New revenue = (0.96 x P0) x (1.012 x Q0) = (0.96 x 1.012) x (P0 x Q0) = 0.97152 x $600 million = $582.912 million
Decrease in revenue = $(600 - 582.912) million = $17.088 million............(2)
Overall change in revenue = (1) - (2) = $(14.72 - 17.088) million = -$3.088 million = -$3.1 million
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