2. Company E, Canada\'s largest ebook company, wants to increase its total reven
ID: 1153218 • Letter: 2
Question
2. Company E, Canada's largest ebook company, wants to increase its total revenue. One strategy is to offer a 15 percent discount on every ebook it sells. Company E knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount Group I(books per day 5000 Group II (books per day) 4500 5500 Sales before the discount Sales after the discount a. Using the midpoint method, calculate the price elasticities of demand for group I and group II. b. Explain how the discount will affect total revenue from each group. c. Suppose Company E knows which group each customer belongs to when he logs on and can choose 5400 whether or not to offer the discount. If Company E wants to increase its total revenue, should discounts be offered to group I or to group II, to neither group, or to both groups?Explanation / Answer
ans.....
a. Percentage change in quantity demanded by group 1 = 5400 - 5000 / 5000 * 100 = 8 per cent.
Percentage change in quantity demanded by group 2 = 5500 - 4500 / 4500 * 100 = 22.22
Thus, Price elasticity of demand = Percentage change in quantity demanded / Percentage change in prices
For group 1, elasticity = 8 / 15 = 0.53.
For group 2, elasticity = 22.22 / 15 = 1.5
b. fall in prices will lead to fall in the total revenue of the group with price elasticity of demand less than 1 or inelastic. In this case , it is group 1. Fall in the prices will lead to increase in total revenue of the group with price elasticity of demand greater than 1 or elastic demand. In this case, the latter is group 2.
c. Thus, if total revenue has to be increased , then discounts have to be offered to group 2 with elastic price elasticity of demand.
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