2) RCO Manufacturing is an electronics manufacturer and retailer. Its main produ
ID: 1140416 • Letter: 2
Question
2) RCO Manufacturing is an electronics manufacturer and retailer. Its main products are ultrabook computers, PCs and calculators. The current price of the ultrabook is £500, the PC is £800 and the calculator is £40. This year the firm sold 10,000 ultrabooks, 20,000 PCs and 1 million calculators.
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:
Ultrabook: (-) 1.5; PC : (-) 2.5; calculator: (-) 0.6
You have been asked to evaluate the planned price increases.
Comment on the planned price changes. Would a 10% price reduction have been better for some or all of the products? What benefit (if any) would advertising bring to the firm?
Explanation / Answer
Answer:
Price elasticity of demand of a commodity shows the proportionate change in quantity demanded of a commodity due to change in prices or percentage change in quantity demanded due to percentage change in price of the commodity.
Formula:
Price elasticity of demand (Ed) = % change in quantity demanded / % change in price
Or
Ed = (q / p) * (p / q)
Where:
q – change in quantity
p – change in price
p- initial price
q- initial quantity demanded
Evaluating the price increase:
Change in quantity demanded of Ultra book, PC and calculator due to 10% increase in price:
Ultra book:
Quantity demanded (sold) (q) = 10,000
Current Price (p)= £500
After 10 % increase: 10 % of 500 is 50 so after the price increase
New price = £550
p = £50
q = ?
Price elasticity = (-) 1.5
*(-) or negative sign before the elasticity shows that with the increase in prices the quantity demand for the product has decreased.
Ed = (q / p) * (p / q)
-1.5 = (q / 50) * (500/10,000)
-1.5 = q / 1000
q = -1500
So due to price increase from 500 to 550 quantity has decreased from 10,000 to 8500 (10,000 - 1500)
PC :
Quantity demanded (sold) (q) = 20,000
Current Price (p) - £800
After 10 % increase: 10 % of 800 is 80 so after the price increase
New price = £880
p = £80
q = ?
Price elasticity = (-) 2.5
*(-) or negative sign before the elasticity shows that with the increase in prices the quantity demand for the product has decreased.
Ed = (q / p) * (p / q)
-2.5 = (q / 80) * (800/20,000)
-2.5 = q / 2000
q = -5000
New quantity = 20,000 – 5000
= 15000
So due to price increased from 800 to 880 the quantity demanded has decreased from 20,000 to 15000
Calculator:
Quantity demanded (sold) (q) = 100,000
Current Price (p) - £40
After 10 % increase: 10 % of 40 is 4 so after the price increase
New price = £44
p = £4
q = ?
Price elasticity = (-) .6
*(-) or negative sign before the elasticity shows that with the increase in prices the quantity demand for the product has decreased.
Ed = (q / p) * (p / q)
-.6 = (q / 4) * (40/100,000)
-.6 = q / 10,000
q = -6000
New quantity = 100,000 – 6000
= 94,000
So due to price increase from 40 to 44 the quantity has decreased from 20,000 to 15000
We can see from the above analysis that the increase in prices of all three commodities has reduced their demands in the market so the decision of price increase will not be beneficial for the firms.
The 10% price decrease will be beneficial for the firms as it will increase the demand for these commodities in the market which will increase the revenues for the firm.
The advertising will be profitable for the firms as it will highlights the qualities, uses and benefits of the products for the customers. Advertising manipulates the customers and attracts them towards the product. So firm should use advertising to attract more customers it will increase the sale of the products and will increase revenues for the firm.
*to evaulate the price increase i have explained price elasticity of demand. hope it will help you
thank you
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