The management of the Mini Mill Steel Company estimated the following elasticity for a special type of steel it produces: Ep=-2, Ei=1, and Exy=1.5, where X refers to steel and Y to aluminium.
These are, respectively, the own-price elasticity, income elasticity, and cross-price elasticity of demand for the steel product.
Next year, the firm has decided to increase the price of the steel it sells by 6percent.
The management forecasted that income of its customers will rise by 4 percent next year and that the price of aluminium will fall by 2 percent.
(a) If the sales this year are 1,200 tons of the steel, how many tons can the firm expect to sell next year, assuming all other independent factors remain the same?
(b) By what percentage must the firm change the price of steel to keep its sales at 1,200 tons next year?