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Quiz 3 - Solutions

Quiz 3 - Solutions - 2 Analysts at your firm have...

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Quiz #3 – ManEc 387 1.) The demand curve for a firm is given by Q x = 1,000 – 5P x + .02P y . Calculate the cross-price elasticity when P x = $150 and P y = $200. (5 pts) The formula for Cross-price elasticity = (dQ x /dP y ) * (P y /Q x ) - note that it is all about how the price of Y affects sales (quantity) of X. dQ x /dP y = 0.02 Py = $200 Qx = 1,000 – 5($150) + .02($200) = 254 So, (dQ x /dP y ) * (P y /Q x ) = 0.02 * (200 / 254) = 0.01575 a.) Is good Y a substitute or complement for good X? (2.5 pts) Substitute . We can tell this because the coefficient on P y is positive. Imagine that good X is Coke and good Y is Pepsi. If the price of good Y (Pepsi) goes up, people substitute away from Pepsi and sales of good X (Coke) go up.
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Unformatted text preview: 2.) Analysts at your firm have calculated that, at the current price, customer elasticity for your firm’s product is -0.7. The firm, like all firms, wants to make more money. The CEO has forgotten everything she learned in ManEc 387 and is relying on you to interpret the elasticity for her. Based on the elasticity of -0.7, should the firm raise or lower the price of its product (if it wants to increase revenue)? (2.5 pts) Since this is less than 1, they are in the inelastic range. Hence the firm should raise the price. The ration of -0.7 indicates that if it raises price by 10% sales will decline by 7% (hence the firm will make more money)....
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