You are the manager of a firm that receives revenues of $50,000 per year from product X and $80,000 per year from product Y

Economics Sep 27, 2020

You are the manager of a firm that receives revenues of $50,000 per year from product X and $80,000 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 1.8.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?

Expert Solution

Change in Revenue = [(R_X * (1+EQ_XPX)) + (R_Y * EQ_YPX)] * % change in price of X

here,

R_X& R_Y= Revenue of X and Y

EQ_XPX= Own price elasticity of demand for product

EQ_YPX= Cross price elasticity of demand between X and Y

Revenue of product X= 50000

Revenue of product Y= 80000

EQ_XPX= -3

EQ_YPX= 1.8

Change in price of X= 2%

So,

Change in revenue= (50000* (1+ (-3))+ (80000* (1.8))* 2%

= (50000* (-2)) + (80000* (1.8))* 2%

= (-100000)+ (144000)* 2%

= (-100000+ 144000)* 2%

= 880

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