1 answer

Question 3 3 Question 3 Suppose the own price elasticity of demand for the products of...

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question 3
3 Question 3 Suppose the own price elasticity of demand for the products of an industry is (-0.7), and the Rothschild Index i
3 Question 3 Suppose the own price elasticity of demand for the products of an industry is (-0.7), and the Rothschild Index is 0.15. What happens to the demand of a representative firm in this industry, if its price increases by 1 %?

Answers

From the Rothschild index we can find that

0.15 = price elasticity of demand for the entire industry / price elasticity of demand for a single firm

This gives

Price elasticity of demand for the representative firm = -0.7/0.15 = -4.67

When there is an increase in the price by 1%, the quantity demanded of this represented firm is likely to decline by 4.67%. this is because price elasticity of demand is the ratio of percentage change in the quantity demanded to percentage change in the price.

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