Answer to Question #219694 in Microeconomics for Romeo

Question

(a)    Suppose widegts have a price elasticiyt of demand equal to -1.95 and a cross elasticitiy of demand equal to 2 with dundles. What are the pricing options for a firm that sells widgets? Explain. (5 marks)

Answer 1

Price elasticity of demand of a good is a measure of how sensitive the quantity demanded of it is to its price. Since the price elasticity of demand is less than one and a negative value (-1.95), the company should seek for ways to increase the sales of its widgets. To achieve a unitary value, that is 1 or any positive value the company should consider factors that affect or determine the quantity of a good demanded. In this case, the firm selling the widgets should consider varying the price of widgets downwards means demand for the widgets will increase from just 2 bundles to more than 2 bundles currently demanded at -1.95 price elasticity of demand.