Question

2. On May 15, 2019, President Trump issued an executive order that bans the export of U.S. technology to Chinese mobile phone manufacturing firms. As a result, the cost of chips that produces mobile phones becomes more expensive. According to Research Report of Mobile Phone Exports in China, the price of Chinese manufacturing mobile phones changed by 10% while the sales volume changed by 15% due to the executive order.

a. With the above figures, calculate the relevant price elasticity for Chinese manufacturing mobile phones. Briefly explain whether this represented the demand elasticity or supply elasticity.

b. Based on the above information, will the revenue of Chines mobile phone producers increase or decrease? Explain. (2 ma

Answer 1

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1. The represented elasticity is demand elasticity as we are dealing with sales volumes.

Here, it states that price has changed by 10% while sales has changed by 15%. Now, since we know law of demand shows an inverse relationship between price and demand, we can conclude that the price increased by 10% due to US market restrictions while sales decreased by 15%.

Elasticity=%change in quantity/%change in price = 15/10 = 1.5

Hence elasticity is 1.5 with a negative sign indicating elasticity of demand.

2. We know that Revenue = Price*Sales.

Here we know that fall in sales of 15% is magnitude than the change in price of 10%. Thus there will be a loss in revenue as the increase in price sees a loss of customers greater than 10%.

Mathematically,

Say initial Price and quantity are 100 each

Then initial reveneue = 100*100 =10000

But after change, the revenue becomes= 110*85=9350

Thus revenue falls