Question

You are considering using good G as a “loss leader” (i.e. dramatically reducing its price to drive buyers to your business)

You should select a good G that has:

1. a high/low (pick one) own-price elasticity of demand. Explain

2. a high/low (pick one) cross elasticity with its complements that you, also, sell. Explain

3. a high/low (pick one) cross elasticity with its substitutes that you, also, sell. Explain

4. Offer an example of a “good G” and explain why it is a good choice based upon 1., 2., and 3. above.

7.0.3

Answer 1

Answer 1. High own price elasticity of demand.

When the demand for a good is price elastic, a fall in the price will lead to rise in total revenue. As a fall in price will lead to larger rise in quantity demanded, so total revenue rises.

Answer 2. High cross price elasticity of demand for complementary goods.

reason- A High cross price elasticity of demand for complementary goods means a fall in price of good x will lead to a high rise in demand for good G. Good G will see a rise in total revenue.

Answer 3. Low cross price elasticity for substitute goods.

Reason- Low cross price elasticity with substitute goods means a fall in price of good x will lead to less fall in quantity demanded of good G. So there is not much fall in total revenue.

Answer 4. Suppose Good G is Coke.

It has high own price elasticity of demand as it has close substitute (Pepsi) available in the market.

The cross price elasticity for complementary goods like Burger is high, so a fall in price of burger leads to high rise in demand for Coke.

The cross price elasticity for substitute goods like Pepsi is high, so a rise in price of pepsi leads to high rise in demand for coke.