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A test shows that reducing current price ($12) by 2% increases unit sales by 3%. Average...

A test shows that reducing current price ($12) by 2% increases unit sales by 3%. Average variable cost is $7 per unit and does not chage when output increases by 3%.

What happens to commission for the sales person if the firm reduces its price by 2% and the commission is a constant percentage of dollar sales?

A. It increases B. It decreases C. It remains constant D. N/A

What happens to profit if the firm reduces its price by 2%?

A. It increases B. It decreases C. It remains constant D. N/A

Business   Economics   
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Answer #1

First part- Option A is correct. It is because when the firm is reducing it’s current price then it has seen an increase in it’sses which also increases the firms profitability as the variable cost has increased but the profit increased is still higher than the cost increased. And since the commision is a constant percentage of sales thus the commision increases.

Second part- Option A is correct. It is because the firms sale has increases but the increase in variable cost is not as high as the increase in profits due to reduction in prices.

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