Revenue at a major smartphone manufacturer was $2.4 billion for the nine months

Question

Revenue at a major smartphone manufacturer was $2.4 billion for the nine months ending March 2, up 86 percent over revenues for the same period last year. Management attributes the increase in revenues to a 123 percent increase in shipments, despite a 37 percent drop in the average blended selling price of its line of phones. Given this information, is it surprising that the company's revenue increased when it decreased the average selling price of its phones? No. Own price elasticity is -3.32, which means demand is elastic and a decrease in price will raise revenues No. Own price elasticity is-0.30, which means demand is elastic and a decrease in price will raise revenues Yes. Own price elasticity is -3.32, which means demand is elastic and a decrease in price will decrease revenues. Yes. Own price elasticity is-0.30, which means demand is inelastic and a decrease in price will decrease revenues.

Explanation / Answer

price elasticity of demand e =% change in quantity demanded (shipments)/% change in price

e= 123/(-37)

e = -3.32

e>1, which means demand is elastic. When demand is elastic, a decrease in price will lead to an increase in demand. This increase in demand leads to an increase in total revenue.

Thus, option A is correct.'

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