Revnol, a manufacturer of cosmetics, prices its popular pink lipstick at $8. On

Question

Revnol, a manufacturer of cosmetics, prices its popular pink lipstick at $8. On the basis of test-marketing, Revnol believes that women between the ages of 18 and 20 have an own-price elasticity of 1.5 and that 60 percent of them are likely to purchase the product. In the age group from 21 to 25 years, the own-price elasticity is 0.8 and 50 percent of them are likely to buy.

(i) In a market with 25,000 women aged 18 to 20, and 15,000 aged 21 to 25, how many lipsticks can the firm expect to sell at a price of $8 per unit lipsticks

(ii) If Revnol were to cut prices by 14 percent, approximately how many more pink lipsticks would it expect to sell?

(c) On a certain product market, 500 units are demanded at a price of $15. The own-price elasticity is 1.5. What is the equation of a linear inverse demand that passes through the point (500, 15)? p(Q) =___________

(d) What is the equation of a constant-elasticity demand function that has an own-price elasticity of 2 and passes through the point (400, 10)? Q(p)=____________

Explanation / Answer

a) 60% of 25000+50% of 15000 = 22500 women will buy lipsticks.

b) 1.5 *14 for women aged between 18 - 20and 0.8*14 for women aged between 21-25

21% increase in demand of women aged between 18-20 and 11.2% increase in demand of women aged between 21-25

21% of 15000 = 3150

11.2% 0f 7500 = 840

total increase = 3990

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