Question

CHAPTE Steve Jobs was pleased to discover that the demand for iPhones was even more elastic than that. Two months after launching the 8 GB iPhone in 2007, he reduced its price from $599 to $399. Unit sales not only increased, they soared, as In the News "After iPhone Price Cut, Sales Are Up by 200 Percent" reports. Demand for the iPhone was very elastic. IN THE NEWS AFTER IPHONE PRICE CUT, SALES ARE UP BY 200 PERCENT Piper Gene Munster, the person responsible for a survey dedicated to Apple in which he "found" out an estimated number of iPhones that were sold, has come up with yet another interesting theory. СМс According to Munster and the past-week Apple announcement about 1 million iPhones sold, the calculations take to the conclusion that after the price cut, the sales increased up to 200 percent.... By Munster's reckoning, Apple and AT&T were selling an average of 9,000 iPhones a day before the price reduction, which would have put their quarterly sales at 594,000 as of September 5 By the end of the quarter, he believes Apple will have sold a total of 1.28 million iPhones. Source: Mobilewhack.com, September 11, 2007 ANALYSIS: If demand is elastic, unit sales increase by a larger percentage than price declines. The demand for iPhones was highly elastic. Determinants of Elasticity

Answer 1

% Change in price = $(599 - 399) / $599 = $200 / $599 = 0.3339 = 33.39%

Elasticity = % Change in quantity demanded / % Change in price = 200% (Stated in question) / 33.39% = 5.99

Since elasticity is much higher than 1, demand is highly elastic. With elastic demand, a decrease in price will increase total revenue.