Given the table of own price elasticities of demand & cross elasticities, describe the relation between the given goods.
The table below shows the estimated price elasticity of demand (in absolute value) and cross elasticity of demand for three goods, Good A, B and C. For ex, the price elasticity of demand for Good B is 0.6 (in absolute value) and the cross elasticity of demand between Good A and Good C is -1.2.
|Change in price of
||Change in the Qty demanded of
(a) What will happen to the quantity of Good A demanded when there is a decrease in its price by 12%? How would you advise the seller of the three goods in order to increase his total revenue?
(b) Elucidate the relationship between Good A and Good B, between Good A and Good C and between Good B and Good C? How does the knowledge of the cross elasticity of demand helps the sellers of these three goods?
(c) A company should always produce at the midpoint of its linear demand curve where its price elasticity of demand equals one (in absolute value). Do you agree? describe.