A firm derives revenue from two sources: goods X and Y.Annual revenues from good X and Y are $10,000 and $20,000, respectively.If the price elasticity of demand for good X is -4.0 and the cross-price elasticity of demand between Y and X is 2.0 then a 2 percent price decrease will
A)increase total revenues from X and Y by $520.
B)decrease total revenues from X and Y by $520.
C)leave total revenues from X and Y unchanged.
D)decrease total revenues for X and Y by $600.

Question

Quizplus · Accepted Answer

A 2% price decrease in good X will increase its quantity demanded by 8% (since elasticity is -4.0), increasing revenue from X by $800. The cross-price elasticity of 2.0 means a 2% price decrease in X will decrease the quantity demanded for Y by 4%, reducing Y's revenue by $800. The net effect is an increase in total revenue by $520.

A Firm Derives Revenue from Two Sources: Goods X and Y.Annual