The Stopdecay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per...

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The Stopdecay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per month over the past year.

business economics

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Answer 1

Answer #1

(1)

New sales = 8,000 - 1,500 = 6,500

Cross-elasticity = (Change in demand of Stopdecay / Average demand of Stopdecay) / (Change in price of Decayfighter / Average price of Decayfighter)

= [- 1,500 / (8,000 + 6,500)] / [(25 - 35) / (25 + 35)]

= (- 1,500 / 14,500) / (- 10 / 60)

= 0.62

(2) Since cross elasticity > 0, they are Substitutes.

(3) Let new price be P to increase quantity from 6,500 to 8,000. Then

- 1.6 = [1,500 / (8,000 + 6,500)] / [(P - 25) / (P + 25)]

- 1.6 = [1,500 / 14,500] / [(P - 25) / (P + 25)]

- 1.6 = (15 / 145) / [(P - 25) / (P + 25)]

- 1.6 = [15 x (P + 25)] / [145 x (P - 25)]

- 1.6 = (15P + 375) / (145P - 3,625)

- 232P + 5,800 = 15P + 375

247P = 5,425

P = $21.96

(4) Revenue (TR) = P x Q

Without price change, TR = $25 x 6,500 = $162,500

With price change, TR = $21.96 x 8,000 = $175,680

(5) Yes, changing price will increase total revenue.

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Answer 2

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The Stopdecay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per...

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