2. PR sells phones for £400 and has observed a recent drop in sales from 1,500 unitsa month, reducing its revenue by £120,000. This has occurred because a competitorhas just reduced its price by 20%. PR wants to restore its sales volume to itsprevious level, and has estimated its price and cross elasticities at -1.4 and 0.8respectively. The phones have a marginal cost of £280.a) Calculate the sales level of PR after the reduction in the competitor's price,assuming PR maintains its price.b) Calculate the necessary price for PR to charge to achieve its objective, assumingthe competitor's price reduction.c) Calculate the effects of the decisions in a) and b) above on profit compared withthe original profit before the drop in sales. Which is the better decision?

2) The question states the impact of reduction in price of phones of competitor on the sales of the…

2. PR sells phones for £400 and has observed a recent drop in sales from 1,500 units a month, reducing its revenue by £120,000. This has occurred because a competitor has just reduced its price by 20%. PR wants to restore its sales volume to its previous level, and has estimated its price and cross elasticities at -1.4 and 0.8 respectively. The phones have a marginal cost of £280. Calculate the sales level of PR after the reduction in the competitor's price, assuming PR maintains its price. b) Calculate the necessary price for PR to charge to achieve its objective, assuming the competitor's price reduction. c) Calculate the effects of the decisions in a) and b) above on profit compared with the original profit before the drop in sales. Which is the better decision?

2. PR sells phones for £400 and has observed a recent drop in sales from 1,500 units a month, reducing its revenue by £120,000. This has occurred because a competitor has just reduced its price by 20%. PR wants to restore its sales volume to its previous level, and has estimated its price and cross elasticities at -1.4 and 0.8 respectively. The phones have a marginal cost of £280. Calculate the sales level of PR after the reduction in the competitor's price, assuming PR maintains its price. b) Calculate the necessary price for PR to charge to achieve its objective, assuming the competitor's price reduction. c) Calculate the effects of the decisions in a) and b) above on profit compared with the original profit before the drop in sales. Which is the better decision?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter3: Demand Analysis

Section: Chapter Questions

Problem 1E: The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales...

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The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales have averaged about 6,000 units per month during the past year. In August, Potomacs closest competitor, Spring City Stove Works, cut its price for a closely competitive model from $600 to $450. Potomac noticed that its sales volume declined to 4,500 units per month after Spring City announced its price cut. What is the arc cross elasticity of demand between Potomacs oven and the competitive Spring City model? Would you say that these two firms are very dose competitors? What other factors could have influenced the observed relationship? If Potomac knows that the arc price elasticity of demand for its ovens is 3.0, what price would Potomac have to charge to sell the same number of units it did before the Spring City price cut?
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