Question

When XYZ rm ondered the maket for good A two years back, i ept e price of ts product low to altact customers ma om ts leadng compethor The fm has now establihed itself and has a maket share of 20 percet The management of XYZ is planning to increase price of A from the crent $6 per unit to $7 per unit Timothy Walters the marketing head howeve, fecs tis is not a good idea because it wll reduce quanly demanded drastically from the curent 1,200 units to 900 unts Hs colleague and the head of the sales department Jake Mayers, feals that the quandly demanded would only decine by 250 units According to Jake the fm can aflord to increase the price becaune even after the price increase they would sl have significant market share Which of the following # true, would inply that the fm s operating in the inelastk portion of the demand curve? OA The quantity demanded decines by 10 percent in response to the S1 price increase OB. The demand curve is vertical OC. The tval Sem has reduced te price of s product by $ O The $1 inease in price canes the leadng competho's market share to increase substantially OE The demand ourve recently shited sich that 20 addtional unts are demanded at each price level

Answer 1

The firm plans to increase prices from $6 per unit to $7 per unit, which implies an increase of :

7- 6 100 16.67percent 6

We now consider the following options and arrive at the best answer to the question.

(a) For demand to be inelastic at a point. we know that the proportionate or percentage change in quantity demanded should be less than the percentage change in price. So, if the proportionate or percentage change in quantity demanded is less than 16.67%, the firm can be said to be operating in the inelastic portion.

(b) If the demand curve is vertical, any change in price has no effect on the quantity demanded, but here the employees say that the demand will reduce by 300 units or 250 units. So, the demand curve for this firm is definitely not vertical.

(c) If the rival firm reduces its price by $1, then XYZ firm would definitely lose out on its customers due to lower prices being offered by the competing firm. Here, nothing hints at the elasticity (or inelasticity) of the demand curve of XYZ firm.

(d) We know that if XYZ increases its price, it will naturally lose out its customers to the leading competitor. Thus, this option too, says nothing about the elasticity of demand.

(e) In this option, it has been mentioned about an increase in demand only.

Therefore, after considering all options, we can conclude that the first option, if true, would imply that the firm is operating in the inelastic portion of the demand curve. In that case, given a 10% decline in quantity demanded, we compute the elasticity as below

10 Elasticity 0.599(<1) 16.67

Since elasticity is less than 1 in this case, we take the First Option as the correct one.