Order InstructionsSuppose some variable, such as the price of a product, increased by 10 percent. What would happen to the quantity demanded of the good? Based on the analysis in Chapter 2 and the law of demand, we know that the quantity demanded would fall. It would be useful for a manager to know whether the quantity demanded would fall by 5 percent, 10 percent, or some other amount. Until now, our analysis of the impact of changes in prices and income on consumer demand has been qualitative rather than quantitative; that is, we focused on the “big picture” to identify only the directions of the changes and said little about their magnitude. While seeing the big picture is an important first step to sound managerial decisions, the successful manager is also adept at providing “detailed” quantitative answers.

Elasticity is a measure of the responsiveness of one variable to changes in another variable. If the own price elasticity of demand for a product is −2, for instance, we know that a 10 percent increase in the product’s price leads to a 20 percent decline in the quantity demanded of the good, since −20%/10% = −2.

Elastic demand: Demand is elastic if the absolute value of the own price elasticity is greater than 1.

Inelastic demand: Demand is inelastic if the absolute value of the own price elasticity is less than 1.

Before you begin, be sure to review the following resources:

Chapter 3: Quantitative Demand AnalysisInstructionsIn this assignment, you are to prepare a report analyzing the two problems below. Be sure to include your own interpretation and opinion as you prepare this report.

You are the manager of a firm that receives revenues of $40,000 per year from product X and $90,000 per year from product Y. The own price elasticity of demand for product X is −1.5, and the cross-price elasticity of demand between product Y and X is −1.8

Going beyond a simple definition, explain what is meant by own price elasticity of demand.Going beyond a simple definition, explain what is meant by cross-price elasticity of demand.Explain why it is important for a business manager or owner to understand the two forms of elasticity.How much will your firm’s total revenues (revenues from both products) change if you increase the price of good X by 2 percent? Show your math.Mr. Abel owns a small chain of gasoline stations in a large Midwestern town. He read an article that said the own price elasticity of demand for gasoline in the United States is −0.2. Because of this highly inelastic demand in the United States, Mr. Abel is thinking about raising prices to increase revenues and profits. He has asked for your opinion.

Discuss the implications of own price elasticity.Discuss the relationship between price changes, revenue, and own price elasticity of demand.Interpret the -0.2 own price elasticity of demand.Do you recommend that Mr. Abel raise prices?Prepare a 3-4 page report in APA style that summarizes your findings. If you use outside resources, cite appropriately. Submit your report using the instructions below.

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