Question

You own goods A and B. You are considering increasing price of good A by 10%. Here is the information you have Pa = 20 Qa = 1000 For each $1 increase in Pa, Qa will decrease by 100. Pb = 12 Qb = 750 For each $1 increase in Pa, Qb will increase by 100. (The point of this exercise is to have you do everything the long way then use the delta r formula so you can see the difference) a . What is Total revenue of A before the price change? b. What is total revenue of A after the price change? c . What is Total revenue of B before the price change? d. What is total revenue of B after the price change? e. What is the change of revenue for A after the price changes? f. What is the change or revenue for B after the price changes? g. What is change in total revenue for both goods after price changes? h. What is the own price elasticity for good A? i. What is the cross price elasticity of A and B? j. Calculate the change of revenue using the formula provided in class. k. Explain why the two methods have different answers. l. To calculate the change in total revenue from the price change, which method do you prefer? Doing parts a-g or doing part h-j? Briefly explain.

Answer 1

For each $1 increase in Pa, Qa will decrease by 100. For each $1 increase in Pa, Qb will increase by 100.

you are considering 10 % increase in price of good A

Part a)  Total revenue of good A before the price change

Part b)   total revenue of good A after the price change

Part c)  Total revenue of B before the price change

Part d) total revenue of B after the price change

Part e) change of revenue for A after the price changes

Part f)  change or revenue for B after the price changes

Part g)  change in total revenue for both goods after price changes

Part h) own price elasticity for good A

Part i) cross price elasticity of A and B