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The demand curve for a product is given by QXd = 1,200 - 3PX - 0.1PZ where Pz = $300.

a. What is the own price elasticity of demand when Px = $140? Is demand elastic or inelastic at this price? What would happen to the firms revenue if it decided to charge a price below $140?

Own price elasticity:

If the firm prices below $140, revenue will: (increase, decrease or not change)

b. What is the own price elasticity of demand when Px = $240? Is demand elastic or inelastic at this price? What would happen to the firms revenue if it decided to charge a price above $240?

Own price elasticity:

If the firm prices above $240, revenue will:

c. What is the cross-price elasticity of demand between good X and good Z when Px = $140? Are goods X and Z substitutes or complements?

Cross-price elasticity:

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Answer:

Explanation:

a. QXd = 1,200 – 3PX – 0.1PZ

Pz = $300 and Px = $140, plugging the values, we get,

Qx = 1200 – 3*140 – 0.1*300.

Qx = 750 units.

Elasticity of demand = \deltaQx/\deltaPx * Px/Qx.

\deltaQx/\deltaPx = -3.

E = -3 * 140/750.

E = -0.56

The elasticity of demand is INELASTIC because the absolute value of elasticity is less than one. If the firm charges a price below $140it might lose out in revenue because the percentage change in demand is less than the price.

b. Px = $240, substituting this into the equation we get

Qx = 1200 – 3*240 – 0.1*300

Qx = 450 units.

E = -3 * 240/450.

E = -1.6

The demand is elastic because the absolute value is less than one. If the firm charges a price above $240 it might lose out on its revenue because the percent change in demand is more than the price.

c. Cross price elasticity of demand Es = \deltaQx/\deltaPz * Pz/Qx.

\deltaQx/\deltaPz = -0.1

Es = -0.1 * 300/750.

Es = -0.04

The goods are complements of each other. As the price of one increases, the demand for other would fall, and vice-versa is true.

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