The demand curve for a product is given Qd=1500−5Px−0.2Pz by where Pz= $300. What is the own price elasticity of demand when Px= $200? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price below $200? What is the own price elasticity of demand when Px= $125? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price above$125? What is the cross-price elasticity of demand between goodX and goodZ when Px=$125? What about when Px= $200? Are goods X and Z substitutes or complements?
To calculate Price Elasticity of Demand, you need to calculate the percent change in demand for each percent change in price of that good. With the knowledge we have of the goods, the demand for that product at $200 would be 440 units. If you increase the price 10%, the demand would drop to 340 units, meaning the demand dropped by 23%. The PED is %Price/%Quantity, which equals 0.435. Being less than 1, the product is inelastic. The revenue would increase for the company if you reduced the price of that product.
At $125, the PED is 1.25, because the change in demand is less than the change in price at that price. Therefore it is elastic at that price. If you decreased the price, you would lose revenue at this rate because the product is elastic at that price.
The cross price elasticity is more complicated to determine, but it is the percent change in the quantity demanded of one divided by the percent change in the price of the other. Using this formula, you can determine whether the goods are substitutes or complements, which just means the following: does the price of one increase with the price of the other, or does one price decrease while the other increases?
I will let you work out the cross price elasticity so as not to complete your assignment for you, but I hope the explanation helped.
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