Question

You are a manager in charge of monitoring cash flow at a company that makes photography

equipment. Traditional photography equipment comprises 40 percent of your revenues, which

grow about 2 percent annually. You recently received a preliminary report that suggests

consumers take three times more digital photographs than photos with traditional film, and that the cross-price elasticity of demand between digital and disposable cameras is -0.3. In 2012, your company earned about $600 million from sales of digital cameras and about $400 million from sales of disposable cameras. If the own price elasticity of demand for disposable cameras is -2,how will a 4 percent decrease in the price of disposable cameras affect your overall revenues from both disposable and digital camera sales?

Ans :

Answer 1

Solution :

The cross-price elasticity between digital and disposable cameras is -0.3.
The total change in revenue of disposable camera would be:
The profit earned by the company from digital camera is $600 million and from traditional camera is S400 million.
There is a fall in the prices of disposable camera by 4%
The own price elasticity of disposable camera is -2

The change in total revenue can be calculated as shown below:

Formula for change in total revenue for two products :-

= [{Amount of sales for good 1 * (1 + own price elasticity of good 1)} + (Amount of sales of good 2 * Cross price elasticity)] * (% change in price of good 1)

= [$400 * ( 1 - 2) + $600 * (- 0.3)] * (- 0.04) = $23.2 million

Thus, our overall revenues will change by $ 23.2 million.

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