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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: 𝑄𝑥𝑑 = 1,200 − 3(140) − 0.1(300) =
750. Substituting the relevant information into the elasticity formula gives: 𝐸𝑄𝑥 ,𝑃𝑥 =
𝑃
140
−3 𝑄𝑥 = −3 750 = −0.56. Since this is less than one in absolute value, demand is inelastic
𝑥
at this price. If the firm charged a lower price, total revenue would decrease.
b. At the given prices, quantity demanded is 450 units: 𝑄𝑥𝑑 = 1,200 − 3(240) − 0.1(300) =
450. Substituting the relevant information into the elasticity formula gives: 𝐸𝑄𝑥 ,𝑃𝑥 =
𝑃
240
−3 𝑄𝑥 = −3 750 = −1.6. Since this is greater than one in absolute value, demand is elastic
𝑥
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
𝑃
300
relevant information into the elasticity formula gives: 𝐸𝑄𝑥 ,𝑃𝑧 = −0.1 𝑄𝑧 = −0.1 750 =
𝑥
−0.04. Since this number is negative, goods X and Z are complements.
```
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