You are the manager of a firm that receives revenues of $40,000 per year from product X and $90,000 per year from product Y. The own price elasticity of demand for product X is -1.5, and the cross-price elasticity of demand between product Y and X is -1.8.

Question

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?

Answer 1

Using the change in revenue formula for two products, ΔR = [$40,000(1 - 1.5) + $90,000(-1.8)] (0.02) = -$3,640. Thus, a 2 percent increase in the price of good X would cause revenues from both goods to change by $3,640.