Abc Inc. sells bike tires for $25. It’s sales have averaged 8,000 units per mont

Question

Abc Inc. sells bike tires for $25. It’s sales have averaged 8,000 units per month. Recently its closes competitor Efg Inc. reduced their price for bike tires form $35 to $30. A result Abc’s sales declined by 1.500 units per month.
A. what is the arc cross elasticity of demand between Abc Inc. and Efg Inc. ? qhat does this indicate about the relationship between the two?
B. If Abc knows that the arc price elasticity of demand is for its bike tires is -1.5, what price would Abc Inc. have to charge to sell the same number of units as it did before the Efg Inc. price cut?
C. What is Abc Inc.’s average monthly revenue from the sale of bike tires before e and after the price change determined in part B.?
D. Is the result in part C. necessarily desirable? What other factors would have to be taken into consideration?

Explanation / Answer

a. arc cross elasticity of demand is given by (% change in x/ %change in y) where % change in x =[x2-x1]/[x2+x1/2] similarly % change in y putting the value of the two products are substitute of each other as decrease in the price of one resulted in fall of demand of the other b.. e= (% change in x/ %change in y) where % change in x =[x2-x1]/[x2+x1/2] here e=1.5 c..average monthly revenue from the sale of bike tires =8,000($25)before e after e revenue= new price from b(8000) d..price of the other firm may not fall further reducing the demand of abc again

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