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Homework answers / question archive / 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

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

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?

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Change in Revenue = [(RX * (1+EQXPX)) + (RY * EQYPX)] * % change in price of X

here,

RX & RY = Revenue of X and Y

EQXPX = Own price elasticity of demand for product

EQYPX = Cross price elasticity of demand between X and Y

 

Revenue of product X= 50000

Revenue of product Y= 80000

EQXPX = -3

EQYPX = 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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