Question

In 2000, the market demand for PC’s was 129 mln. units and the average margin was 20% of sales. Average price was $ 1922. By 2003 prices dropped to an average price of $ 1708 and demand grew to 161 mln. units while average margins declined to 17 % of sales. A) What is the price elasticity over this time period? B) How did total revenues change (%)? C) How did profits (=total revenue*margin) change (%)?

Answer 1

A) Price elasticity = Q2-Q1/(q2+Q1/2) / P2-P1/(P2+P1/2)

=161-129/(161+129/2) / 1708-1922/(1708+1922/2)

= (32/145) / (-214/1815)

= 0.220689655172/0.11790633608

= 1.87

B) Total revenue = Price X Quantity

2000: 129m x 1922 = 247938000000

2003: 161m x 1708 = 274988000000

C) Profit margin = total revenue x margin

Profit margin in 2000 = 49587600000

Profit margin in 2003 = 46747960000

Change in profits = profit in 2003-profit in 2000/profit in 2000 x 100

=46747960000-49587600000/49587600000 x 100

=-2839640000/49587600000x100

=-5.72%

So,the profits declined by 5.72%