Answer to Question #124283 in Economics for ali raza

Question

You are a manager in charge of monitoring cash flow at a company that makes photography
equipment. Traditional photography equipment comprises 40 percent of your revenues, which
grow about 2 percent annually. You recently received a preliminary report that suggests
consumers take three times more digital photographs than photos with traditional film, and that
the cross-price elasticity of demand between digital and disposable cameras is -0.3. In 2012, your company earned about $600 million from sales of digital cameras and about $400 million from sales of disposable cameras. If the own price elasticity of demand for disposable cameras is -2, how will a 4 percent decrease in the price of disposable cameras affect your overall revenues from both disposable and digital camera sales?

Answer 1

Digital and disposable cameras seem to be complements, as they have negative cross-price elasticity of demand.

If the own price elasticity of demand for disposable cameras is -2, then a 4 percent decrease in the price of disposable cameras will increase your overall revenues from both disposable and digital camera sales.