Question

Question 3 (50 points) Part A (25 points) A computer manufacturer is considering lowering prices to increase sales. He is debating between lowering the price for the desktop PC or the laptop PC. When he lowered prices two years ago, a eso decrease in price for the €500 desktop PC resulted in a growth in desktop PC sales from 7,500 to 10,000 units per month. A €70 decrease in the price of the €700 laptop PC increased sales from 4.000 to 7.500 units per month. (a) Calculate the price elasticity of demand for the desktop PC (show all calculations). (b) Calculate the price elasticity of demand for the laptop PC (show all calculations). (c) Which PC should he choose to put on sale? Explain your answers with reference to the elasticity calculations in (a) and (b) above AND the application of the total revenue test. Part B (25 points) You are asked to advice on the relationship between two products. The only information you have is that if you increase the price of your product from €1.50 to €1.80, the demand for your competitor's product increases from 1,000 units to 1,300. What economic tool could you use to help provide advice? a) What is the relationship between your product and that of your competitor? b) What would be your short-run and long-run strategy? Show all calculations.

Answer 1

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