Answer to Question #124279 in Economics of Enterprise for ali raza

Question

Revenue at a major cellular telephone manufacturer was $2.3 billion for the nine months
ending March 2, up 85 percent over revenues for the same period last year. Management
attributes the increase in revenues to a 108 percent increase in shipments, despite a 21 percent drop in the average blended selling price of its line of phones. Given this information, is it surprising that the company’s revenue increased when it decreased the average selling price of its phones? Explain.

Answer 1

No, it is not surprising that the company's revenue increased when the average selling price was decreased. According to the law of demand, more quantity is demanded when the prices are reduced,therefore, when the company reduced the selling prices, more cell phones were demanded hence an increase in revenues.

Additionally,the effect of price changes on revenue is determined by the elasticity of demand on the cell phone. As a luxury, it therefore has an elastic demand, thus fall in price results to an increase in sales revenue, due to the greater increase in demand.

References.

Mankiw, N. Gregory,. (2011). Principles of microeconomics 6th ed. Cengage Learning