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# Answer to Question #100882 in Microeconomics for MEDHAT

Question #100882
Toby company sells mobile phones at $80 and profits were$ 9,600 a week.
The company is considering reducing prices by 20% to increase its market share. Estimated price elasticity of demand is 1.6.
Required
Estimate the effect of price cuts on company revenues.
If a competing company reduces the price by 20% compared to Toby , what effect does this have on Tobi, assuming that the elasticity of the cross demand is 0.8.
1
2020-01-03T09:32:42-0500

If price elasticity of demand is 1.6, it means that quantity demanded rises by 20Ã—1.6=32%. Then, company revenues change is 1.32Q1Ã—0.8P1-Q1Ã—P1=0.05Ã—Q1P1 (increases by 5%) = 0.05Ã—9,600=0,480 $If a competing company reduces the price by 20% and cross elasticity is 0.8, it means that quantity demanded decreases by 20Ã—0.8=16%. Then, company revenues change is 0.84Q1Ã—P1-Q1Ã—P1=-0.16Q1P1 (decreases by 16%)=- 0.16Ã—9,600=-1,530$

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