Final answer:
Increasing the price of product X by 2% in a firm with an own price elasticity of demand of -2.5 for product X and a cross-price elasticity of 1.7 with product Y will result in a decrease in total revenue of $620.
Step-by-step explanation:
The student is asking about the change in total revenue that would result from a price increase in product X, given its own price elasticity of demand and the cross-price elasticity of demand with product Y. Since the own price elasticity of demand for product X is -2.5, a 2% increase in the price will lead to a 5% decrease in quantity demanded for product X (as elasticity is the percentage change in quantity demanded divided by the percentage change in price).
Revenue change for product X = (Percentage change in quantity demanded) x (Original revenue)
Revenue change for product X = (-5%) x ($60,000) = -$3,000.
Additionally, with a cross-price elasticity of 1.7 between products Y and X, the price increase of product X will lead to a 3.4% increase in quantity demanded for product Y (as cross-price elasticity is the percentage change in quantity demanded of one good due to a percentage change in price of another good).
Revenue change for product Y = (Cross-price elasticity of demand) x (Price change of product X) x (Original revenue)
Revenue change for product Y = 1.7 x 2% x $70,000 = $2,380.
Summing the changes of both products, total revenue change = Revenue change for product X + Revenue change for product Y
Total revenue change = (-$3,000) + $2,380 = -$620.
Hence, with a price increase of 2% for product X, the firm's total revenues will decrease by $620.