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 −2.0 and the cross-price elasticity of demand between Y and X is 1.5,then a 4 percent increase in the price of X will:
A) increase total revenues from X and Y by $800.
B) increase total revenues from X and Y by $8,000.
C) decrease total revenues from X and Y by $400.
D) increase total revenues from X and Y by $400.

Question

Quizplus · Accepted Answer

The correct answer is A.The price elasticity of demand for good X is -2.0, which means that a 4 percent increase in the price of X will lead to an 8 percent decrease in the quantity of X demanded. The cross-price elasticity of demand between Y and X is 1.5, which means that a 4 percent increase in the price of X will lead to a 6 percent increase in the quantity of Y demanded. Therefore, the total revenue from X will decrease by 8 percent, or $800, and the total revenue from Y will increase by 6 percent, or $1,200. The net effect is an increase in total revenues from X and Y by $400.

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