You are the manager of a rm that receives revenues of 175000

You are the manager of a rm that receives revenues of $175,000 per year from product X and $50,000 per year from product Y . Both products have similar production costs. 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 1.6. The end of the quarter is approaching and your boss is feeling pressured to increase the rm’s revenues. To that end, he suggests a 2 percent price increase to product X, since that is the most successful product in the rm.

a. Are products X and Y substitutes? Complements?
b. Do you think your boss’ suggestion will have the desired eect?

Solution

a. X and Y are substitutes because their cross elasticty is positive. If they were complements, their cross lasticity would have been negative.

b. Since Price elasticity is less than cross elascity therefore, the boss suggestion will have desired effect. More of people will shift to good Y and sales of good Y will increase by an amount more than as compared ot fall in sales.