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ECO 3320-001 Fall 2014 Instructor: Lanlan Chu Name___________________________ R#________________________ Quiz 3 Q: The demand curve for a product is given by Qdx = 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? 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? 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? Keys: a. At the given prices, quantity demanded is 750 units: = 1,200 − 3(140) − 0.1(300) = 750. Substituting the relevant information into the elasticity formula gives: , = 140 −3 = −3 750 = −0.56. Since this is less than one in absolute value, demand is inelastic at this price. If the firm charged a lower price, total revenue would decrease. b. At the given prices, quantity demanded is 450 units: = 1,200 − 3(240) − 0.1(300) = 450. Substituting the relevant information into the elasticity formula gives: , = 240 −3 = −3 750 = −1.6. Since this is greater than one in absolute value, demand is elastic at this price. If the firm increased its price, total revenue would decrease. c. At the given prices, quantity demanded is 750 units, as shown in part a. Substituting the 300 relevant information into the elasticity formula gives: , = −0.1 = −0.1 750 = −0.04. Since this number is negative, goods X and Z are complements.