You are a manager in charge of monitoring cash flow at a company that makes phot

Question

You are a manager in charge of monitoring cash flow at a company that makes photography equipment. Traditional photography equipment comprises 40 percent of your revenues, which grow about 2 percent annually. You recently received a preliminary report that suggests consumers take three times more digital photographs than photos with traditional film, and that the cross-price elasticity of demand between digital and disposable cameras is –0.3. In 2012, your company earned about $600 million from sales of digital cameras and about $400 million from sales of disposable cameras. If the own price elasticity of demand for disposable cameras is –2, how will a 4 percent decrease in the price of disposable cameras affect your overall revenues from both disposable and digital camera sales?

Instruction: Round your response to one decimal place.

Explanation / Answer

Elasticity x perecentage change in price (own or related) = perecentage change in demand.

now due to change in price of disposable camera percentage change of digital camera demand is =(-0.3 x 4) = -1.2 that means demand for digital camera will increase by 1.2% so revenue from digital camera will be 604.8 million

similarly demand for digital camera will be 432 million after increasing price.

Therefore total revenue will be 1036.8 million.

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