XYZ Corporation is a manufacturer of widgets. Over the past several months, it has been selling its widgets for $100 each and unit sales have averaged 5,000 units per month. This month its competitor, ABC, Inc. raised the price of its widgets from $100 to $110. XYZ noted that its unit sales increased by 200 units.
a. What is the cross price elasticity of demand between XYZ’s and AB C’s widgets?
b. If XYZ knows that the price elasticity of demand for its widgets is -2.0, what price would XYZ be able to charge and still sell 5,000 widgets, assuming ABC keeps its price at $110?