Question

Microsoft wants to calculate the effect of a worldwide 5% price cut on its sales of Excel to clients in different countries. Microsoft sells Excel at different prices in U.S., Japan and Europe. Before the price cut U.S. sales were twice sales in Japan and Europe. If the price of elasticity of demand in the U.S., Japan and Europe are -3, -4, and -2 respectively, the worldwide sales rise by

A) 10%.

B) 15%.

C) 20%.

D) 25%.

I know that the answer is C but i want to know how to get it

Answer 1

Ans: 15%

Explanation:

Market share of U.S = 50% or 0.5

Market share of Japan = 25% or 0.25

Market share of Europe = 25%   or 0.25

We know

PED = % change in Quantity demanded / % change in price

% change in Quantity demanded = PED * % change in price

So,

% increase in Quantity demanded in U.S = 3 * 5 = 15%      [Here, absolute value of PED is taken]

% increase in Quantity demanded in Japan = 4 * 5 = 20%

% increase in Quantity demanded in Europe = 2 * 5 = 10%

Thus, the worldwide rise in sales = (0.5 * 15%) + (0.25 * 20%) + (0.25 * 10%)

                                                      = 7.5% + 5% + 2.5%

                                                      = 15%