Question

You are the manager of a firm that receives revenues of $20,000 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 −1.6.

Required:
How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?

Answer 1

$3,600

Step-by-step explanation:

Calculation to determine How much will your firm's total revenues change if you increase the price of good X by 2 percent?

Using this formula

Change in Revenue = [PxQx * (1 + Ex) + PyQy * (Ey)] * % change in P

Let plug in the formula

Change in Revenue= [$20,000*(1-2) +$100,000*(1.6)] * 2%

Change in Revenue= [$20,000*(-1) + $100,000*(-1.6)] * 2%

Change in Revenue= [-$20,000 + (-$160,000)] * 2%

Change in Revenue= $180,000*2%

Change in Revenue=$3,600

Therefore how much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent will be $3,600