Answer to Question #58767 in Microeconomics for shalini

Question

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.

Answer 1

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%