The company is considering lowering the price of Model A to $27 in an effort to increase the number of units sold. Based on the results of price changes that have been instituted in the past, Tennis Products’ chief economist estimates the arc price elasticity of demand to be –2.5. Furthermore, she estimates the arc cross elasticity of demand between Model A and Model B to be approximately 0.5 and between Model A and Model C to be approximately 0.2. Variable costs per unit are not expected to change over the anticipated changes in volume. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution margin of Model A. Based on this analysis, should the firm lower the price of Model A? Explain

The company is considering lowering the price of Model A to $27 in an effort to increase the number of units sold. Based on the results of price changes that have been instituted in the past, Tennis Products’ chief economist estimates the arc price elasticity of demand to be –2.5. Furthermore, she estimates the arc cross elasticity of demand between Model A and Model B to be approximately 0.5 and between Model A and Model C to be approximately 0.2. Variable costs per unit are not expected to change over the anticipated changes in volume. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution margin of Model A. Based on this analysis, should the firm lower the price of Model A? Explain

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter3: Demand Analysis

Section: Chapter Questions

Problem 10E

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If automobiles and gasoline are complements, then their cross-elasticity coefficient is a. strictly greater than 1. b. positive. c. equal to zero. d. negative.
The company is considering lowering the price of Model A to $27 in an effort to increase the number of units sold. Based on the results of price changes that have been instituted in the past, Tennis Products’ chief economist estimates the arc price elasticity of demand to be –2.5. Furthermore, she estimates the arc cross elasticity of demand between Model A and Model B to be approximately 0.5 and between Model A and Model C to be approximately 0.2. Variable costs per unit are not expected to change over the anticipated changes in volume. a. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution margin of Model A. Based on this analysis, should the firm lower the price of Model A? Explain b. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution margin for the entire line of tennis rackets. c. Based on this analysis, should the firm lower the price of Model A? Explain
The formula for the arc price elasticity can be written (where AQ denotes the change in Q) as: h=[AP/(P₁ + P₂)]/[AQ/(Q₁ + Q₂)]. h=[AQ/(P₁+P₂)]/[AP/(Q₁ + Q₂)]. h=[AQ/(Q₁ + Q₂)]/[AP/(Q₁ + Q2)]. h=[AQ/(Q₁ + Q₂)]/[AP/(P₁ + P₂)].
According to the reading "Gasoline Consumption in the US and Norway", the estimate for the long- run price elasticity of demand was Ed=1.44. We also know that there is better access to public transportation in Norway than in the US. So, this estimate likely the true long-run price elasticity of demand for gasoline. In other words, if the public transit system in Norway was the same as in the US, a 1% increase in the price of gas would reduce the quantity demanded in the long-run by. than 1.44%. (Fill in the blanks.) O Overstates, more. Overstates, less. Overstates, more. O Understates, less.
The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales have averaged about 6,000 units per month during the past year. In August, Potomac's closest competitor, Spring City Stove Works, cut its price for a closely competitive model from $600 to $520. Potomac noticed that its sales volume declined to 4,500 units per month after Spring City announced its price cut. What is the arc cross elasticity of demand between Potomac's oven and the competitive Spring City model? -1 0 2.0 -2.0 If Potomac knows that the arc price elasticity of demand for its ovens is -2.0, what price would Potomac have to charge to sell the same number of units it did before the Spring City price cut? $536 $520 $433 $577
Elasticity of Software The Valve Corporation, a software entertainment company, recently ran a holiday sale on its popu- lar Steam software program. Using data collected from the sale, it is possible to estimate the demand corresponding to various discounts in the price of the software. Assuming that the origi- nal price was $40, the demand for the software can be estimated by the function q = 3,751,000p-2.826 where p is the price and q is the demand. Calculate and interpret the elasticity of demand. Source: codinghorror.com.
The Stopdecay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per month over the past year. Recently, its closest competitor, Decayfighter, reduced the price of its electric toothbrush from $35 to $25. As a result, Stopdecay's sales declined by 1,500 units per month. If Stopdecay knows that the arc price elasticity of demand for its toothbrush is −1.6, what price would Stopdecay have to charge to sell the same number of units as it did before the Decayfighter price cut? Assume that Decayfighter holds the price of its toothbrush constant at $30. $25.00 $30.75 $21.96 $28.46 It Stopdecay does not change its price, the average monthly total revenue would be . On the other hand, if it changes the price to sell the same number of units as it did before, the average monthly total revenue would be . Should Stopdecay change the price of its electric toothbrush?
The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales have averaged about 6,000 units per month during the past year. In August, Potomac's closest competitor, Spring City Stove Works, cut its price for a closely competitive model from $600 to $545. Potomac noticed that its sales volume declined to 4,500 units per month after Spring City announced its price cut. a) What is the arc cross elasticity of demand between Potomac's oven and the competitive Spring City model? b) If Potomac knows that the arc price elasticity of demand for its ovens is −2.0, what price would Potomac have to charge to sell the same number of units it did before the Spring City price cut?
The equation of an estimated demand function is as follows: - QdA (Quantity demand for A) = 200.5 - 2.5 Pa - 1.5Pb + 3.5 I where, Pa = Price of A Pb = Price of B [It is a related product] I = Income (i) Determine the demand when Pa = $ 500, Pb = $ 100 and I = $ 3000 (ii) Estimate the price elasticity, cross-price elasticity and income elasticity of the demand according to point method. (iii) Estimate the elasticity of the demand according to proportion method if Pa2 = $ 515, Pb2 = $ 105 and I = $ 3500.
The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1,500 per day to 1,800 per day. Compute the arc price elasticity of demand over this price and consumption quantity range.
In 2019, ABC Company, the largest company in the funeral business with 14% of total industry revenue, saw its average revenue per service (its product price) rise by 9 percent. At the same time, the number of funeral services performed fell by 5.8 percent. We can thus calculate the price elasticity of demand for its services directly as -(5.8/9) = -0.64. Its price and quantity demanded last year suggest that its demand is inelastic— and we thus know from this calculation that its total revenue from these services increased. What should ABC Company do if it wants to raise its total revenue still further?
The price elasticity of demand for a textbook sold in the United States is estimated to be -2, whereas the price elasticity of demand for books sold overseas is -3. The U.S. market requires hardcover books with a marginal cost of $40; the overseas market is normally served with softcover texts on newsprint, having a marginal cost of only $15. The profit-maximizing price in the U.S. market is and the profit-maximizing price in the overseas market is . MR=Px(1+1/Ed)