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Question 9 At $85 , a firm can sell 4,850 stereo earphones (3.5 mm for android)....

Question 9

At $85 , a firm can sell 4,850 stereo earphones (3.5 mm for android). At this price, elasticity is estimated at 2.6. What is the change in total revenue (+ or -) if the firm drops price by 9%? Round your answer to the nearest dollar.

Question 10 (10 points)

At $177, a firm can sell 18,520 stereo earphones (3.5 mm for android). These are premium earphones, guaranteed for 5 years. At this price, elasticity is estimated at 0.4. What is the change in total revenue (+ or -) if the firm drops price by 11%?

Expert Solution

Answer;

Part A Revenue Increase by $ 50.690

Part B Revenue Increase by $ 232197

Explanation;

Part A)

Sale price = $85

Demand = 4,850 units

Revenue Before Change in Price = Sale Price x Demand

= $85 x 4,850

= $412,250

Elasticity = 2.6

Price Drop = 9%

New Selling Price = $85 - 9% = $77.35

New Selling Quantity = ND

Revenue After change in Price = New Selling Price x New Selling Quantity

Change in Revenue = Revenue After Change in Price - Revenue Before Change in Price

Formula ; Price Elasticity of Demand =( Q1 - Q0 / Q0) / (P1 - P0 / P0)

So,

2.6 = (ND - 4.850 / 4850) / ($85 - $77.35/$85)

2.6 = ND - 4850 / 4850 x9%

2.6 = ND - 4850 / 436.5

2.6 x 436.5 = ND - 4850

1134.9 = ND - 4850

ND = 4850 + 1134.9

New Demand = 5984.9 or 5,985 Units

Change in Total Revenue =5,985 units x $77.35 - 4,850 units x $85

Change in Total Revenue = $462,939.75 - $412,250

Change in Total Revenue = $50,689.75 or $50690(Increase)

Part B)

Sale price = $177

Demand = 18,520 units

Revenue Before Change in Price = Sale Price x Demand

= $177 x 18,520 Units

= $3,278,040

Elasticity = 0.40

Price Drop = 11%

New Selling Price = $177 - 11% = $157.53

New Selling Quantity = ND

Revenue After change in Price = New Selling Price x New Selling Quantity

Change in Revenue = Revenue After Change in Price - Revenue Before Change in Price

Formula ; Price Elasticity of Demand =( Q1 - Q0 / Q0) / (P1 - P0 / P0)

So,

0.40= (ND - 18,520 / 18,520) / ($177-$157.53/$177)

0.4 = ND - 18,520/ 18,520 x11%

0.4 = ND - 18,520 / 2037.2

0.4 x 2037.2 = ND - 18,520

814.88 = ND - 18,520

ND = 18.520 + 814.88

New Demand = 19334.88 or 19,335 Units

Change in Total Revenue =19,335 units x $157.53 - 18,520 units x $177

Change in Total Revenue = $3,045,842.55 - $3,278,040

Change in Total Revenue = $232,197.45 or $232,197(increase)

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jeff jeffy answered 2 years ago

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