Firm A faces a price elasticity of demand of -2

Economics Dec 11, 2020

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 rise of 12.5%

a fall of 12.5%

a rise of 25%

a fall of 25%

Expert Solution

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

% change in quantity =% change in price * price elasticity of demand

=5* (-2.5)

=-12.5

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