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[Solution Library] Suppose that ELM Corporation sells two products, A and B. Suppose further that ℮ A = -1.5 and ℮ B = -2, where ℮ i denotes the own-price elasticity

Question: Suppose that ELM Corporation sells two products, A and B. Suppose further that ℮ A = -1.5 and ℮ B = -2, where ℮ i denotes the own-price elasticity of product i. Suppose further that the ℮ AB , cross-price elasticity between the quantity demanded of A and the price of B, is 1/3, and that ℮ BA = 0.5. Finally, suppose that MC A = $200 and MC B = $300.

  1. Based on this information, what prices would maximize profits if A and B were produced by two separate firms?
  2. Are A and B complements or substitutes?
  3. Does your answer to part b suggest that prices will be higher or lower when sold by a single firm than they would be if produced by two separate firms?
  4. Fill in the following table. The first row contains the current values for P A , Q A , P B , and Q B .
    P A Q A P B Q B %ΔP A %ΔQ A %ΔP B %ΔQ B TR
    2147 2500 1500 4000 -- -- -- --
    2100 1492 4000 -2.19% -0.53% 0%
    2053 1343 -2.24% 0% -9.99%
  5. Would you recommend changing the price of P A from $2147? If not, why not? If so, what type of change would tend to raise profit and why?
  6. Would you recommend changing the price of P B from $1500? If not, why not? If so, what type of change would tend to raise profit and why?

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