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Firm A faces a price elasticity of demand of -2
Firm A faces a price elasticity of demand of -2.5 and a cross-price elasticity of demand with Firm B's product of 0.75. If Firm B lowers its price by 10% and Firm A leaves its price unchanged, then the change in Firm A's quantity sold will be
Question 13 options:
a)
a rise of 7.5%
b)
a rise of 15%
c)
a decline of 7.5%
d)
a decline of 15%
Expert Solution
Computation of Change in Firm A's quantity:
Cross-Price Elasticity of Demand = % Change in Quantity /% Change in Price
% Change in Quantity = % Change in Price * Price Elasticity of Demand
= -10%*(0.75)
= -7.50%
So, the quantity of firm A will decline by 7.50%.
The correct option is C "a decline of 7.5%".
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