# Own price and cross-price elasticity of demand

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7. Consider a market characterized by the following inverse demand and supply functions: PX = 40 - 4QX and PX = 10 + 2QX. Compute the surplus received by consumers and producers.

$25 and $25, respectively.

$20 and $40, respectively.

$40 and $20, respectively.

$50 and $25, respectively.

8. Long-term contracts:

increase transaction costs and increase opportunism.

increase transaction costs.

can reduce opportunistic behavior.

reduce transaction costs and increase flexibility.

35. Rent seeking:

involves resources paid to politicians to enhance one group at the expense of another.

results in less monopoly power.

results in externalities.

None of the statements are correct.

38. You are the manager of a firm that receives revenues of $20,000 per year from product X and $70,000 per year from product Y. The own price elasticity of demand for product X is -2, and the cross-price elasticity of demand between product Y and X is -1.5.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 1 percent?

Instructions: Round your answer to the nearest dollar. Include a minus (-) sign if applicable.

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#### Solution Preview

3. The Consumer Surplus and Producer Surplus are $50 and $25, respectively.

8. Long-term contracts can reduce opportunistic behavior.

35. Rent seeking involves resources paid to politicians to enhance one group at the expense of another.

38. The ...

#### Solution Summary

This solution shows how to calculate the change in total revenue over two products, X and Y, when the price of X changes and the own price elasticity of X and the cross-price elasticity of Y are known.

Strategic Management

B.B. Lean is a catalog retailer of a wide variety of sporting goods and recreational products. Although the market response to the company's spring catalog was generally good, sales of B.B. Lean's $140 deluxe garment declines from 10,000 to 4,800 units. During this period, a competitor offered a whopping $52 off their regular $137 price on deluxe garment bags.

a) Calculate the arc cross-price elasticity of demand for B.B. Lean's deluxe garment bag.

b) B.B. Lean's deluxe garment bag sales recovered from 4800 units to 6000 units following a price reduction of $130 per unit. Calculate B.B. Lean's arc price elasticity of demand for this product.

c) Assuming the same are price elasticity of demand calculated in part B, determine the future price reduction necessary for B.B. Lean to fully recover lost sales (i.e., regain a volume of 10000 units).