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.

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.

Expert's answer

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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