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You are the manager of a firm that receives revenues of $50,000 per year from product X and $100,000 per year from product Y
You are the manager of a firm that receives revenues of $50,000 per year from product X and $100,000 per year from product Y. The own price elasticity of demand for product X is -2, and the cross-price elasticity of demand between product Y and X is 1.4. How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 1 percent?
Expert Solution
Total revenue will increase by $900. Given a 1% increase in the price of X, quantity sold will drop by 2%, so total revenue will drop by roughly 1%. Assuming the price of good Y is not changed, the quantity of good Y sold and revenue will increase by 1.4%. So total revenue change = 50,000*(-1%) + 100,000*(1.4%) = 1400 - 500 = $900.
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