Question

2. The demand curve for a product is given by Qdx= 1,000-2px .02Pz, where Pz= $400
a. What is the own price elasticity of demand when Px= $154? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided tochange a price below $154?
b. What is the own price elasticity of demand when Px= $354? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided tocharge a price above $354?
c. What is the cross-price elasticity of demand between good X and good Z when Px= $154? Are goods X and Z substitutes or complements?

Answer 1

Own price elasticity is the percentage change in quantity demanded of the commodity due to percentage change in own price of the commodity.

Total revenue is the total amount earned by the seller by seller all the units of output.

Cross-price elasticity is the percentage change in quantity demanded of the commodity due to percentage in price of related goods.

As per information, and.

(a)

At,

Hence, is own price elasticity of demand.

Since, the absolute value of own price elasticity of demand is less than 1. It means that demand is inelastic. Any decision to decrease the price of the commodity will lead to fall in total revenue earned by the firm.

(b)

At,

Hence, is own price elasticity of demand.

Since, the absolute value of own price elasticity of demand is greater than 1. It means that demand is elastic. Any decision to increase the price of the commodity will lead to fall in total revenue earned by the firm.

(c)

At,

Hence, is cross-price elasticity of demand.

Since, the cross-price elasticity of demand is a positive number. It means that goods X and Z are substitutes.