Question 1. Answer the following questions based on the accompanying diagram
a) How much would the firm’s revenue change if it lowered price from $12 to $10? Is demand elastic or inelastic in this range?
b) How much would the firm’s revenue changed if it lowered price from $4 to $2? Is demand elastic or inelastic in this range?
c) What price maximizes the firm’s total revenue? What is the elasticity of demand at this point on the demand curve?
Question 2: Suppose the own price elasticity of demand elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -6. Determine how much the consumption of this good will change if:
a) The price of good X increases by 5 percent
b) The price of good Y increases by 10 percent
c) Advertising decreases by 2 percent
d) Income falls by 3 percent
Question 3: Suppose the cross-price elasticity of demand between goods X and Y is -5.How much would the price of good Y have to change I order to increase the consumption of good X by 50 percent.
Question 4: For the first time in two years, Big G ( the cereal division of General Mills raised cereal prices by 2 percent. If as a result of this price increase, the volume of all cereal sold by Big G dropped by 3 percent, what can you infer about the own price elasticity of demand for Big G cereal? Can you predict whether revenues on sales of its Lucky charms brand increased or decreased? Explain.