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Analyzing Situations with Elasticity Concepts

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1. Answer the following questions based on the accompanying diagram
a. How much would the firm's revenue change if it lowered price from $12 to $10? Is demand elastic or inelastic in this range?
b. How much would the firm's revenue changed if it lowered price from $4 to $2? Is demand elastic or inelastic in this range?
c. What price maximizes the firm's total revenue? What is the elasticity of demand at this point on the demand curve?

(see attached file for graph)

2. Suppose the own price elasticity of demand elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -6. Determine how much the consumption of this good will change if:
a. The price of good X increases by 5 percent
b. The price of good Y increases by 10 percent
c. Advertising decreases by 2 percent
d. Income falls by 3 percent

3. Suppose the cross-price elasticity of demand between goods X and Y is -5.How much would the price of good Y have to change I order to increase the consumption of good X by 50 percent.

4. For the first time in two years, Big G ( the cereal division of General Mills raised cereal prices by 2 percent. If as a result of this price increase, the volume of all cereal sold by Big G dropped by 3 percent, what can you infer about the own price elasticity of demand for Big G cereal? Can you predict whether revenues on sales of its Lucky charms brand increased or decreased? Explain.

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Solution analyzes the given situation with the help of elasticity concepts.

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