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    Calculating the Elasticity Coefficients

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    The demand curve for a product is given by QXd = 1,200 - 3PX - 0.1PZ where Pz = $300.

    a. What is the own price elasticity of demand when Px = $140? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below $140?

    Instruction: Round your response to 2 decimal places.

    Own price elasticity:

    Demand is:

    If the firm prices below $140, revenue will:

    b. What is the own price elasticity of demand when Px = $240? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price above $240?

    Instruction: Round your response to 1 decimal place.

    Own price elasticity:

    Demand is:

    If the firm prices above $240, revenue will:

    c. What is the cross-price elasticity of demand between good X and good Z when Px = $140? Are goods X and Z substitutes or complements?
    Instruction: Round your response to 2 decimal places.

    Cross-price elasticity:

    Goods X and Z are:

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    Solution Preview

    The demand curve for a product is given by QXd = 1,200 - 3PX - 0.1PZ where Pz = $300.

    a. What is the own price elasticity of demand when Px = $140? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below $140?

    QXd=1200-3PX-0.1PZ
    Put Pz=300
    QXd=1200-3PX-0.1*300=1170-3PX

    Differentiate with respect to PX we get
    d(QXd)/dPX=-3

    Now calculate QXd at Px=$140
    QXd=1170-3PX=1170-3*140=750

    Own price elasticity of demand=Ep=d(QXd)/dPX*(Px/QXD)=-3*(140/750) =-0.56

    Own ...

    Solution Summary

    Solution depicts the steps to estimate the elasticity coefficients in the given case.

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