Question

For some time, two firms have charged $1.00 per unit of strapping material for securing loads on long-haul trucks and each has been selling about 30,000 units per month.Last month, Strap-It reduced its price to $0.80 per unit and its volume increased to 40,000 units.During that month, TieDown (the other company) maintained its price at $1.00 but saw its volume decline to 24,000 units.

a. What is the price elasticity of demand facing Strap-It?

b. What is TieDown’s cross-price elasticity of demand for Strap-It price changes?

c. If the price elasticity of demand forTieDown is the same as that for Strap-It, what price reduction for TieDown would be required to increase its monthly volume back to 30,000 units per month?

Answer 1

Given that initially, Pstrap-It1 = $1.00 per unit and PTieDown = $1.00 per unit, QStrap-It1 = QTieDown1 = 30,000 units per month.

a) Strap-It reduced its price to Pstrap-It 2= $0.80 per unit sales become QStrap-It2 = 40,000 units. We know that elasticity takes up the rule ed = % change in Q/% change in P

=(40000 - 30000)*100/30000 / (0.80 - 1.00)*100/1.00 = -1.667

b) During that month, PTieDown2 = 1.00 and QTieDown2 = 24000 units. Hence the cross price elasticity = (24000 - 30000)*100/30000 / (0.80 - 1.00)*100/1.00 = -1

c. If the price elasticity of demand forTieDown is the same as that for Strap-It = -1.667,, the % price reduction required for TieDown to increase its monthly volume back to 30,000 units per month would be

-1.667 = (30000 - 24000)*100/30000 / % change in price

% change in price = -12%

Its own price should fall by -12% from 1.00 to 0.88 per unit.