Answer to Question #296901 in Microeconomics for rehnuma

Question

Given the on-going pandemic, the sale of Willis cleaning products jumped 15% to Rs. 425 million and increased income by 28%. Household sales surged 7% and profits rose 65% as both prices and demand increased and a germ-averse public stocked up. Assume yourself as an ambitious manager of Willis cleaning products, who wants to use these changes in the 4th quarter to calculate the own-price elasticity of demand. You have the data on changes in price and changes in quantity sold during the quarter.

Required: 1. What would be the main challenge they would face in calculating a reliable estimate of elasticity? 2. Suppose for the 3rd quarter this challenge did not exist, rather the challenge was one of data availability. All the manager knows, a few minutes before a quickly called meeting to discuss 3rd quarter results, is that the price of a pack of 35-count Clorox Wipes increased by 12% while revenue from those wipes increased by 5%. Calculate the own-price elasticity of demand for Clorox Wipes in this quarter.

Answer 1

a) The firm's main challenge is that it's offering services and services are not easily quantifiable hence posing a challenge in calculation of the reliable estimate of elasticity.

$Own Price Elasticity=\frac{∆InQuantity}{∆Inprice}$

Where the changes are in percentage.

$Own Price Elasticity=\frac{15}{12}=1.25$