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You are the manager of a firm that receives revenues of $50,000 per year from product X and $90,000 per year from product Y. The own price elasticity of demand for product X is -3, and the cross-price elasticity of demand between product Y and X is 1.6. How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent

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Answer:

$-120

Explanation:

Own Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

-3 = percentage change in quantity demanded / 2%

percentage change in quantity demanded = --3 x 2% = -6%

The quantity demanded of good X would fall by 6%

Revenue would change by -0.06 x  $50,000 = -$3000

Cross price elasticity of demand measures the responsiveness of quantity demanded of good Y to changes in price of good X.

1.6 = percentage change in quantity demanded of good Y / 2%

percentage change in quantity demanded of good Y = 1.6 x 2% = 3.2%

The quantity demanded of good Y would increase by 3.2%

Revenue would change by 0.032 x $90,000 = $2880

Total change = -$3000 + $2880 =-$120

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