Question

The manager of Beta Company is considering to sell its new product at the price of $500 and the price elasticity of demand at the price range is -0.8. (i) What is the marginal revenue from the sales of the product at the demand point? and (ii) As a consultant to this company, are you going to recommend to the company a higher price or a lower price than $500?

Answers:	a) MR = +$125, and recommend a lower price.
	b) MR = -$125 and recommend a higher price.
	c) MR = -100, and recommend a higher price.
	d) MR = +100, and recommend a lower price.

The Magic hamburger Company is currently selling 10,000 units of hamburgers at the price of $10. The manager of the company is considering 10% increase in price (from $10.00 to $11.00.) and 20% increase in advertising next year. The price elasticity of demand is -1.0 and the advertising elasticity of demand is +1.0. Assuming that the price and advertising effects are independent and additive, what will be the forecasted quantity of sales for the next year?

Answers:	a) 9,000 units
	b) 10,000 units
	c) 11,000 units
	d) 12,000 units

Answer 1

(Question 1) Option (b)

MR = P x [1 + (1 / Ep)] where Ep: Elasticity of demand

MR = $500 x [1 - (1/0.8)]

MR = $500 x (1 - 1.25)

MR = $500 x (-0.25)

MR = -$125

Since MR < 0, output should be decreased by increasing price.

(Question 2) Option (c)

Price elasticity = % Change in quantity / % Change in price

-1 = % Change in quantity / 10%

% Change in quantity = 10% x (-1) = -10% (Decrease)

Decrease in quantity = 10,000 x 10% = 1,000..........(1)

Advertising elasticity = % Change in quantity / % Change in advertising

1 = % Change in quantity / 20%

% Change in quantity = 20% x 1 = 20% (Increase)

Increase in quantity = 10,000 x 20% = 2,000..........(2)

Net effect = (1) + (2) = -1,000 + 2,000 = 1,000

New quantity = 10,000 + 1,000 = 11,000