Question

Apple, the consumer electronics giant, on Tuesday rolled out new versions of its popular iPod music player. CEO Steve Jobs also unveiled cheaper models of its Touch music player, a touchscreen-only device. An 8-gigabyte version now costs $229, down from $299. A 32-gigabyte model costs $399, down from $499. Steve Jobs decided to decrease the price of iPods in an attempt to increase total revenue from iPod sales. One of his employees, Jess, disagrees and suggests that an iPod price increase will increase total revenue. Who is correct? a. Steve is correct if demand is price elastic. b. Steve is correct if demand is price inelastic. c. Jess is correct if demand is price elastic. d. Jess is correct if demand is unit elastic. e. None of the above

Answer 1

Ans. Option a

Price elasticity of demand for ipods is the %change in quantity demanded of ipods due to 1% change in price. So, if the Steve decides to decrease the price of the ipods, then total revenue, which is product of price and quantity, will increase if the %increase in quantity demanded is more than the %decrease in price of the ipod and if this is the case then, 1% decrease in price leads to increase in quantity demanded of ipods by more than 1% making demand for ipods elastic.

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