Question

Abdul Sdn. Bhd. sells 100,000 bicycles each year at RM250 per bicycle. From past experience the manager of Abdul Sdn Bhd believes the price elasticity of the company’s bicycles is approximately - 0.8. The manager is thinking of increasing the bicycle’s prices to RM300 per bicycle, an increase of 20%.

1. Calculate the anticipated % change in the company’s sales volume.
2. Calculate the new total revenue.
3. Should the manager of Abdul Sdn Bhd change his pricing strategy? Justify your answer

Answer 1

Quantity sold = 100,000 bicycles

Price = RM 250

Price elasticity of demand = 0.8

New price = RM 300

% ∆ P = 20%

Change in quantity will be 16% (Decrease).

New Quantity = 100,000 × (1 - 0.16) = 84,000

ii. New Total revenue = 300 × 84,000 = RM 25,200,000

Old total revenue = 250 × 100,000 = RM 25,000,000

iii. He can increase the price of the bicycle because the elasticity of demand is inelastic. In case of inelastic demand higher the price higher the total revenue. Refer the previous part the total revenue has increased after the increase in price.

Please contact if having any query will be obliged to you for your generous support. Your help mean a lot to me, please help. Thank you.