Question

11. Revenue at a major cellular telephone manufacturer was $2.3 billion for the nine months ending March 2, up 85 percent over revenues for the same period last year. Management attributes the increase in revenues to a 108 percent increase in shipments, despite a 21 percent drop in the average blended selling price of its line of phones. Given this information, is it surprising that the company's revenue increased when it decreased the average selling price of its phones? Explain.

Answer 1

The price elasticity of demand dictates the relationship between price and total revenue.

If demand for a good is inelastic then in that case increase in its price leads to increase in total revenue and decrease in price leads to decrease in total revenue.

On the other hand, if demand for a good is elastic then in that case increase in its price leads to decrease in total revenue and decrease in its price leads to increase in total revenue.

In the given case, company has decreased the average selling price of its phone and has experienced an increase in its total revenue.

This is not a surprising phenomena.

It is due to the elasticity of demand for the phones of the company.

The demand for the phones of the company is elastic.

Due to this elastic demand, as the company has reduced the price, it has experienced an increase in total revenue.