3. Willy Widget, Inc. manufactures widgets. Their most popular model currently s
ID: 1140072 • Letter: 3
Question
3. Willy Widget, Inc. manufactures widgets. Their most popular model currently sells for $8.00. Sales volume is consistent at six thousand (6,000) widgets per month. A close competitor, Molly Modget, Inc, in a radical move in this industry, cut the price of their [comparable] modget from $8.00 to $6.00. Wy Widget has estimated the cross price elasticity of demand between the two firms' at +0.65, given current economic conditions and price levels. What impact, Eny, wil he action by Molly Modget Inc. be on total revenue (monthly) generated by the Wily Widget, if Willy Widget leaves its current price unchanged? 4. Classify each good with regard to the elasticity information given and show what will happen to the quantity demanded (direction and magnitude), in each case . Joyce's income elasticity for hot dogs is-25. Her income decreases by 10%. .Jared's price elasticity of demand for Coke is -1.5. The price of Coke increases by 20% Janice 's cross price elasticity of demand for Coke with respect to a price change of Pepsi is +06. The price of Pepsi decreases by 15%. Jodi's income elasticity for steak is +12 Her income increases by 6%. *Explanation / Answer
(3)
Current revenue = Price x Quantity = $8 x 6,000 = $48,000
Cross-price elasticity = % Change in demand for Willy / % Change in price of Molly
0.65 = [(Q - 6,000) / 6,000] / [$(6 - 8) / $(6 + 8)] {Where Q: New demand for Willy}
0.65 = [(Q - 6,000) / 6,000] / (-2 / 14)
0.65 = [(Q - 6,000) / 6,000] / (-1 / 7)
0.65 = (-7) x [(Q - 6,000) / 6,000]
0.65 = (- 7Q + 42,000) / 6,000
3,900 = - 7Q + 42,000
7Q = 38,100
Q = 5,443 (Considering integer value for number of widgets)
New revenue = Price x New quantity = $8 x 5,443 = $43,544
Change in revenue = $43,544 - $48,000 = -$4,456
So total revenue of Willy will decrease by $4,456.
NOTE: As per Answering Policy, 1st question has been answered.
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