A company produces and sells video games in two separate geographic markets, the US and Europe....
A company produces and sells video games in two separate geographic markets, the US and Europe. Market research has revealed that at the current price, the elasticity of demand in Europe is -2. The research also estimates that at that same price the elasticity of demand in the US is -0.5. The company is currently charging the same price per copy, P = $100, in the US market and the European market. The marginal cost of production is the same, regardless of where the videogame is sold, and equal to $30 (ignore transportation costs). Should the company raise, reduce or maintain the price of its videogame in Europe? Should the company raise, reduce or maintain the price of its videogame in the US? Explain!
Homework Answers
Answer : In Europe the elasticity of demand is -2. This means that the demand is elastic in Europe. In case of elastic demand if price fall then the quantity demanded increase. This means that in case of elastic demand if producers decrease the price level then they can sell more units of the good and can earn more profit. As in Europe the demand is elastic hence the company should reduce the price level for it's video game.
In US the elasticity of demand is -0.5. This means that the demand is inelastic in US. In case of inelastic demand if price change then the quantity demanded does not change too much. This means that in case of inelastic demand if producers increase the price level then their selling does not change too much. As a result, producers can earn more profit by charging high price. As in US the demand is inelastic hence the company should raise the price level for it's video game.
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