Answer to Question #187988 in Microeconomics for Aaron

Question

1.    DBS Farms is a producer and retailer of farm products. DBS main products are Mangoes, Pawpaw and Pineapples. The current price of the Mangoes per Kilogram is GHS 50, the Pawpaw/Kg is GHS 80 and the Pineapple is GHS 40. This year the DBS Farms sold 10,000 kgs of Mangoes, 20,000 kgs of Pawpaw and 1 million kgs of Pineapples. In an attempt to improve revenue, the managers of the firm have decided to increase all prices by 10%. Market research has suggested that the price elasticity of demand for each product is: Mangoes: - 1.5; Pawpaw: -2.5; Pineapples: - 0.6. You have been asked to evaluate the planned price increases.

 

a.      Comment on the planned price changes.

1. Would a 10% price reduction have been better for some or all of the products?

Answer 1

a. The planned price increase will be good for products with inelastic demand such as Pineapples, but will be bad for Mangoes and Pawpaw, which have elastic demand.

1. A 10% price reduction would have been better for Mangoes and Pawpaw.