Question

In a rapidly growing market like energy drinks, firms need to capture the market scenario quick enough. Firms that fail to keep up the changing pace with the market can lose out to their competitors. Red bull is one of the brands in the energy drink industry. Red bull has estimated the demand of its product by the following function: Q = 12.5 P0 -1.1A 2.1Y 1.3P -1.8 Where, Q = Number of energy drink bottles sold of Red bull P0 = Price of red bull energy drink bottle (in $) A = Promotional expenditure yearly in $100 Y = Average income of the consumers per month in $100 P = Number of people using the gyms per month The current price for one bottle of Red Bull energy drink $3, promotional expenditure is $600, Average income of consumers is $500 and on an average 100 people are going to gym every month.

a) Will the revenue of Red Bull decrease, if they increase the price of their bottles?

b) If number of people going to gym increases, does it affect the sales of energy drink bottles?

c) Will the profit of Red Bull reduce, if they increase the price of their energy drink bottle?

d) Do you think Gym subscription can complement the sale of Red Bull energy drink?

Answer 1

Red bull has estimated the demand of its product by the following function:

Q = 12.5 P0 -1.1A 2.1Y 1.3P -1.8

The current price for one bottle of Red Bull energy drink $3, promotional expenditure is $600, Average income of consumers is $500 and on an average 100 people are going to gym every month .

Thus P0 = $ 3

          A = $ 600

            Y = $ 500

            P = 100

Q = Number of energy drink bottles sold of Red bull

Thus from above data

Q = 12.5 P0 -1.1A 2.1Y 1.3P -1.8

a)

No , the revenue of Red Bull will not decrease, if they increase the price of their bottles , since Q ( Number of energy drink bottles ) is positively related to the P0 ( Price of red bull energy drink bottle) in the given function

Positive Sign in given function implies increase in the price of their energy drink bottle , will increase the quantity demanded for product .

b)

If number of people going to gym increases, it will slightly affect total demand Red bull bottles

Since the quantity demanded is inversely related to the P( Number of people using the gyms per month ) , if number of people using gyms per month falls or decrease , then demand Q will increase .

c)

No , the profit of Red Bull will not reduce, if they increase the price of their energy drink bottle .

Since Number of energy drink bottles is positively related to the Price of red bull energy drink bottle in the demand function , so slight increase in Price of bottles will increase demands of Red Bull bottles .

More the demand more will be the profit.

d)

No , Gym subscription can not complement the sale of Red Bull energy drink , since the quantity demanded is inversely related to the P( Number of people using the gyms per month ) . So more the number of people using gym will not increase total demand of drink bottles .