Question

You are the manager of a firm that produces goods X and Y. Your rm receives revenues of $40,000 per year from product X and $90,000 per year from product Y. The price elasticity of demand for product X is |-0.75| and the cross price elasticity of demand between product Y and X is -1.7.

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

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

-0.75 = % change in quantity / 2%

-1.5 = % change in quantity

lets assume that 1,000 units of X were sold at $40 each, total revenue = $40,000

new total revenue = 985 x $40.80 = $40,188

revenue generated by good X will increase by 0.47%, from $40,000 to $40,188

price elasticity of demand = % change in quantity of Y / % change in price of X

-1.7 = % change quantity of Y / 2%

-3.4% = % change quantity of Y

lets assume that 1,000 units of Y were sold at $90 each, total revenue = $90,000

new total revenue = 966 x $91.80 = $88,678.80

revenue generated by good Y will decrease by -1.47%, from $90,000 to $88,678.80