Let\'s consider two smokers A and B who, following a 20% decrease in the price o

Question

Let's consider two smokers A and B who, following a 20% decrease in the price of cigarettes, increase their smoking by 6% and 30%, respectively.
If you are a seller of cigarettes and you sell in 2 different markets, but you realize that when you lower your price by 24%, your quantity sold are increased by 8% in one market and by 36% in the other market, in which market would your total revenue increase or decrease? Let's consider two smokers A and B who, following a 20% decrease in the price of cigarettes, increase their smoking by 6% and 30%, respectively.
If you are a seller of cigarettes and you sell in 2 different markets, but you realize that when you lower your price by 24%, your quantity sold are increased by 8% in one market and by 36% in the other market, in which market would your total revenue increase or decrease?
If you are a seller of cigarettes and you sell in 2 different markets, but you realize that when you lower your price by 24%, your quantity sold are increased by 8% in one market and by 36% in the other market, in which market would your total revenue increase or decrease?

Explanation / Answer

Price elasticity of demand in one market = 8% / 24% = 0.33  

Since PED is less than 1, demand for cigarettes is inelastic. So, in this market a decrease in price would lead to decrease in total revenue.

Price elasticity of demand in other market = 36% / 24% = 1.5

Since PED is greater than 1, demand for cigarettes is elastic. So, in this market a decrease in price would lead to increase in total revenue.

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