Answer to Question #147141 in Economics for jonelle

Question

The manager of a sole distributorship for a famous brand of automobiles was discussing with the assistant manager the planned introduction by mid-year of a new model, the XP-60. It was decided earlier that the price be set at P400,000, at which level the total number of units sold was estimated at 500 units annually. The assistant manager has suggested that the price should be set at a somewhat lower level, say, at P360,000 in

order to attract a major segment of the non-targeted market. At this lower price, 1,000 units are expected to be sold.

Answer 1

The price elasticity of demand is very elastic in this case, so the decrease in price from P400,000 to P360,000 will increase total revenue from P200,000,000 to P360,000,000.

So, the price should be lowered.