ou've just been hired to run a division of a toy manufacturing company. Your boss informs you that the doll line in your division will be discontinued and replaced by a new and improved set of dolls later this year. He also tells you that he wants you to raise prices on the current doll line by 20% in order to protect profitability during the transition. You go to a number of sources including field sales reps, market research, and other division heads to ask them how responsive customers have been to changes in prices in the past. They tell you that a 10% increase in price always leads to a 5% decrease in sales volume at the firm. What is your recommendation to your boss and what is your reasoning?
You've just been hired to run a division of a toy manufacturing company. Your boss informs you that the doll line in your division will be discontinued and replaced by a new and improved set of dolls later this year. He also tells you that he wants you to raise prices on the current doll line by 20% in order to protect profitability during the transition. You go to a number of sources including field sales reps,
What is your recommendation to your boss and what is your reasoning?
Recall that,
- If demand is inelastic, increasing prices raises revenue.
- If demand is elastic, increasing prices decreases revenue.
Therefore, raising the prices would be profitable if the demand is inelastic. Now,
- Demand is inelastic if elasticity < 1
- Demand is elastic if elasticity > 1
- Also, elasticity =
Now we have all we need to answer the question
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