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Homework answers / question archive / 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 leaves its price unchanged when Firm A lowers its price by 5%, then the change in Firm A's quantity sold will be
a)
a rise of 12.5%
b)
a fall of 12.5%
c)
a rise of 25%
d)
a fall of 25%
Change in Firm A's quantity sold will be a fall of 12.5%
Option B. is correct.
Explanation:
Price elasticity of demand =% change in quantity /%change in price
or
% change in quantity =% change in price * price elasticity of demand
=5* (-2.5)
=-12.5
