Answer to Question #220072 in Microeconomics for Tee

Question

Suppose widgets have a price elasticity of demand equal to -1,95 and a cross elasticity of demand equal to 2 with dundles. What are the pricing options for a firm that sells widgets? Explain.

Answer 1

Given,

Price elasticity of demand of widgets = -1.95

Cross elasticity of widgets = 2 dandles

Elasticity is defined as the responsiveness or sensitiveness on the demand if the factor influencing it changes.

Elasticity plays a very important role in deciding the price of the product. This is because it shows how the consumer is going to respond to the change in the price.

Here, the price elasticity of demand of widgets is -1.95 indicating that the rise in the price by 1% will lead to a fall in the demand for the widgets by 1.95% which is elastic. Thus, if the firm will raise the price by smaller amount the demand will fall significantly due to which the total revenue of the firm will fall. So, the sellers of widgets must keep the price lower.