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Homework answers / question archive / You are the manager of a firm that receives revenues of $60,000 per year from product X and $90,000 per year from product Y
You are the manager of a firm that receives revenues of $60,000 per year from product X and $90,000 per year from product Y. The own price elasticity of demand for product X is -1, and the cross-price elasticity of demand between product Y and X is 1.2. How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 1 percent?
The revenue from good X as a result of the price change of 1% will remain constant; it will not change.
Good X has an own price elasticity of demand of -1, which means any percentage change in price will result in an equal and opposite percentage change in quantity. Since total revenue is price × quantity, the percentage change in price will be nullified by the percentage in quantity.
The cross-price elasticity of demand of 1.2 suggests that a positive relationship exists between the percentage change of the price of good X and the percentage change in the quantity demanded for good Y. An increase in the price of good X by 1% will result in a 1.2% increase in the quantity demanded for good Y. The price increase of good X by 1% will cause the revenue from good Y to increase by 1.2%.
