Answer to Question #189118 in Microeconomics for Rexford Obour

Question

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.

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

Answer 1

Given 

The current price of the Mangoes per Kilogram is GHS 50 and the quantity is 10,000 kgs of mangoes. 

The current price of the Pawpaw/Kg is GHS 80 and the quantity is 20,000 kgs of Pawpaw. 

The current price of the Pineapple is GHS 40 and the quantity is 1 million kgs of pineapples. 

The price elasticity of demand for each product is:

Mangoes: - 1.5

Pawpaw: -2.5

Pineapples: - 0.6.

Total revenue in the current prices are:

Total revenue from Mangoes $= 50 × 10,000 = 500,000.$

Total revenue from Pawpaw $= 80 × 20,000 = 1,600,000.$

Total revenue from pineapples $= 40 × 1 million = 40 million.$

Total revenue from all fruits $= 500,000 + 1,600,000 + 40,000,000 = 42,100,000.$

Now the new prices and the quantity. 

Price elasticity of demand $=\frac{\%\Delta Q}{\%\Delta P}$

For Mangoes. 

New price = 55. New quantity = 85,000 

New total revenue = 55 × 85000 = 467,500. 

For Pawpaw. 

New price = 88, New quantity = 15,000. 

New total revenue = 88 × 15,000 = 1,320,000 

For pineapples. 

New price = 44, New quantity = 9,400,000. 

Total revenue = 41,360,000.

 

New total revenue from all the fruits $= 467,500 + 1,320,000 + 41,360,000 = 43,147,500.$

price increase by 10% has given increase in revenue but it is advisable to increase price only in pineapple.

price reduction 10% will be advisable in mango and pawpaw based on price elasticity of demand.