Question

When the firm "Pro Swing" entered the market for golf balls two years ago, it kept the price of its product low to attract customers away from its leading competitor. The firm has now established itself and has a market share of 20 percent. Management is considering a price increase from the current $2.00 per golf ball to $2.50. Jim Walters, the firm's marketing head, believes the price increase will reduce quantity demanded drastically from the current 1,200 units to 900 golf balls. His colleague and the head of the sales department, Jake Mayers, feels that the quantity demanded would only decline by 75 balls. Assuming Jake is correct (and Jim is not), which of the following statements is true?

Group of answer choices

A.Demand for golf balls is inelastic and Pro Swing should raise the price

B.Demand for golf balls is inelastic and Pro Swing should not raise the price

C.Demand for golf balls is elastic and Pro Swing should raise the price

D.Demand for golf balls is elastic and Pro Swing should not raise the price

Answer 1

As the price of the golf balls increases from $2 to $2.5, the quantity declines by 75 balls (according to Jake). Current balls sold = 1,200 units

Elasticity is the responsiveness of the quantity demanded to the change in the price.

percentage change in quantity demanded = change in quantity *100 / original quantity demanded = -75*100 / 1200 = -6.25%

percentage change in price = (2.5-2) * 100 / 2 = 25%

Elasticity = percentage change in quantity demanded / percentage change in price = -6.25 / 25 = -0.25

Since the absolute value of elasticity is less than 1, we say that the demand for balls is inelastic. When the demand is inelastic, price and revenue move in the same direction. On increasing the price, the total revenue will go up, so Pro swing should raise the price.

Since the demand for golf balls is inelastic, it eliminates option C and option D. Since the total revenue increase as the demand is inelastic, this eliminates option B.

Therefore, the correct answer is A.Demand for golf balls is inelastic and Pro Swing should raise the price