Question

Your manager asks you to calculate how lowering the price of your best-selling product by 5% will affect sales. Describe the economic tool you will use to provide an answer. Then, contrast the three possible outcomes your research may determine.

Answer 1

Answer:-

Price elasticity of demand measures the responsiveness of the change in quantity demanded due to change in the price of the good. By evaluating the elasticity of demand, the change in revenue can be determined.

Thus economic tool used would be price elasticity of demand.

It can give three possible results, the revenue may increase, decrease or remain the same.

When the elasticity of demand is elastic, a 5% price rise would reduce the quantity demanded by more than 5%, reducing the total revenue (price times quantity).

If the elasticity of demand is inelastic, then a 5% fall in price would reduce the quantity demanded by less than 5% and thereby increases the total revenue.

Finally, if the elasticity of demand is unit elastic, a 5% price rise would reduce the quantity demanded by exactly 5%, then the total revenue would remain unchanged.