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Calculating the change in output

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Sailright Inc. manufactures and sells sailboards. Management believes that the price elasticity of demand is -3.0. Currently, boards are priced at $500 and the quantity demanded is 10,000 per year.

A. If the price is increased to $600, how many sailboards will the company be able to sell each year?

B. The cross-price elasticity of demand between Sailright and its closest competitor is +2.25 and income elasticity of demand is +1.5. If income increases by 5% and its competitor reduces its prices by 10%, how much would Sailright have to change its prices to keep its total sales unchanged? Assume that price elasticity of demand is still -3.0.

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Solution Summary

Solution calculates the change in output in response to the given variations.

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A. If the price is increased to $600, how many sailboards will the company be able to sell each year?

I will use mid point formula for my calculations.

Change in prices=(600-500)/((600+500)/2)= 0.181818
Let new sales be Q
Change in sales=(Q-10000)/((Q+10000)/2)
Change in sales=Price elasticity of demand*change in ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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