Stopdecay Co. sales an electric toothbrush for $25. It sales have averaged 8,000
ID: 1217384 • Letter: S
Question
Stopdecay Co. sales an electric toothbrush for $25. It sales have averaged 8,000 units per month over the past year. Recently, its closest competitor, Decay Fighter reduced the price of tis toothbrush from $35 to $39. As a result, Stopdecay's sales declined by 1,500 per month. (You do not need to use mid-point elasticity formula you can use simple formula.) (a) What are the cross elasticity of demand between Stopdecay's toothbrush and Decayfighter's toothbrush? What does this indicate about the relationship between the two ptoducts. (b) If Stopdecay knows that the arc price elasticity of demand for its toothbrush is -1.5, what price would Stopdecay have to charge to sell the same number of units as it did before the Decayfighter's price cut? Assume that the Decayfighter holds the price of its toothbrush at $30. (c) What is Stopdecay's average monthly total revenue from the sale of electric toothbruss before and after the pri9_e change, determined in part (b )?
Explanation / Answer
Assuming the price has declined from 39 to 35
a)Ed= (1500-8000)/ (1500+8000) / (39-35)/ (39+35)
=-6500/9500 / (4)/(74)
=-0.684/0.054
=-12.66
b)Ed=1.5
Ed=(1500-8000)/ (1500+8000) / (x-35)/ (x+35)
1.5=(1500-8000)/ (1500+8000) / (x-35)/ (x+35)
1.5/-0.684=(x+35)/(x-35)
-2.192(x-35)=x+35
76.75-2.192x=x+35
2.192x+x=76.75-35
3.192x=41.754
x=13.08
c)beforeTR = P×Q = 25× 8000 = 200,000
afterTR = P×Q =13.08×1500 = 19620