1How much would the firm’s revenue change if it lowered price from $12 to $10? Is the demand elastic or inelastic in this range? |

When P = $12, R = ($12)(1) = $12. When P = $10, R = ($10)(2) = $20. Thus, the price decrease results in an $8 increase in total revenue, so demand is elastic over this range of prices.

How much would the firm’s revenue change if it lowered price from $4 to$2? IS the demand elastic or inelastic in this range? |

When P = $4, R = ($4)(5) = $20. When P = $2, R = ($2)(6) = $12. Thus, the price decrease results in an $8 decrease total revenue, so demand is inelastic over this range of prices.

What price maximizes the firm’s total revenues? What is the elasticity of demand at this point on the demand curve? |

Total revenue is maximized at the point where demand is unitary elastic.

We also know that marginal revenue is zero at this point. For a linear demand curve, marginal revenue lies halfway between the demand curve and the vertical axis. In this case, marginal revenue is a line starting at a price of $14 and intersecting the quantity axis at a value of Q = 3.5. Thus, marginal revenue is 0 at

3.5 units, which corresponds to a price of $7 as shown below

2

Suppose the own price 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 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

Use the own price elasticity of demand formula to write % ΔQxy /5=2 quantity demanded of good X will decrease by 10 percent if the price of good X increases by 5 percent.

b

Use the cross-price elasticity of demand formula to write % ΔQ/10=-6 demand for X will decrease by 60 percent if the price of good Y increases by 10