7.
You are a manager in charge of monitoring cash flow at a major publisher.
Paper books comprise 40 percent of your revenues, which grow about 2
percent annually. You recently received a preliminary report that suggests
the growth rate in ebook reading has leveled off, and that the cross-price
elasticity of demand between paper books and ebooks is -0.3. In 2016, your
company earned about $600 million from sales of ebooks and about $400
million from sales of paper books.
If the own price elasticity of demand for paper books is -2, how will a 4
percent decrease in the price of paper books affect your overall revenues
from both paper books and ebooks sales?
Instruction: Enter your response rounded to one decimal place.
Your overall revenues will change by $ 23.2 ± 0.1 million.
Explanation
Using the change in revenue formula for two products, ΔR = [$400(1 - 2) + ($600(-0.3)]
× (-0.04) = $23.2 million, so revenues will increase by $23.2 million.
