Week 2

In this assignment, you are to prepare a report analyzing the two problems below. Be sure to include your own interpretation and opinion as you prepare this report. 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 Going beyond a simple definition, explain what is meant by own price elasticity of demand. Going beyond a simple definition, explain what is meant by cross-price elasticity of demand. Explain why it is important for a business manager or owner to understand the two forms of elasticity. How much will your firm’s total revenues (revenues from both products) change if you increase the price of good X by 2 percent? Show your math. Mr. Abel owns a small chain of gasoline stations in a large Midwestern town. He read an article that said the own price elasticity of demand for gasoline in the United States is 0.2. Because of this highly inelastic demand in the United States, Mr. Abel is thinking about raising prices to increase revenues and profits. He has asked for your opinion. Discuss the implications of own price elasticity. Discuss the relationship between price changes, revenue, and own price elasticity of demand. Interpret the -0.2 own price elasticity of demand. Do you recommend that Mr. Abel raise prices? Prepare a 3-4 page report in APA style that summarizes your findings. If you use outside resources, cite appropriately. Submit your report using the instructions below.