Question #58767

b) If price elasticity of demand (PED) is -1.7, it is feasible that a company cuts the price by 5% in order to generate enough total revenue.

Expert's answer

If the company cuts the price by 5%, demand will rise by 8,5%. Without the price cut the total revenue is:

PQ

and after the price cut becomes:

(1-5%)P * (1+8.5%)Q = 0.95P*1.085Q = 1.03075PQ

By cutting the price by 5% the company increases the total revenue by 3.075%

Answer: it is feasible that the company cuts the price by 5%

PQ

and after the price cut becomes:

(1-5%)P * (1+8.5%)Q = 0.95P*1.085Q = 1.03075PQ

By cutting the price by 5% the company increases the total revenue by 3.075%

Answer: it is feasible that the company cuts the price by 5%

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