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Download ECO 3320-001 Fall 2014 Instructor: Lanlan Chu
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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 β 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: ππ₯π = 1,200 β 3(140) β 0.1(300) = 750. Substituting the relevant information into the elasticity formula gives: πΈππ₯ ,ππ₯ = π 140 β3 ππ₯ = β3 750 = β0.56. Since this is less than one in absolute value, demand is inelastic π₯ at this price. If the firm charged a lower price, total revenue would decrease. b. At the given prices, quantity demanded is 450 units: ππ₯π = 1,200 β 3(240) β 0.1(300) = 450. Substituting the relevant information into the elasticity formula gives: πΈππ₯ ,ππ₯ = π 240 β3 ππ₯ = β3 750 = β1.6. Since this is greater than one in absolute value, demand is elastic π₯ 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 π 300 relevant information into the elasticity formula gives: πΈππ₯ ,ππ§ = β0.1 ππ§ = β0.1 750 = π₯ β0.04. Since this number is negative, goods X and Z are complements.
