Revenue at a major cellular telephone manufacturer was $2.5 billion for the nine

Question

Revenue at a major cellular telephone manufacturer was $2.5 billion for the nine months ending March 2, up 80 percent over revenues for the same period last year. Management attributes the increase in revenues to a 142 percent increase in shipments, despite a 22 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 -6.45, which means demand is elastic and a decrease in price will raise revenues. No. Own price elasticity is -0.15, which means demand is elastic and a decrease in price will raise revenues. Yes. Own price elasticity is -0.15, which means demand is inelastic and a decrease in price will decrease revenues. Yes. Own price elasticity is -6.45, which means demand is elastic and a decrease in price will decrease revenues.

Explanation / Answer

Own price elasticity = (% change in quantity demanded) / (% change in price)

                                    = (142% / -22%)

                                    = -6.45

Since the elasticity is greater than 1, the demand is elastic. It means decrease in price will increase the demand with greater effect. Therefore, it is not surprising.

Answer: No. Own price elasticity is -6.45, which means demand is elastic and a decrease in price will raise revenues.

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