Question

When XYZ firm entered the market for good A two years​ back, it kept the price of its product low to attract customers away from its leading competitor. The firm has now established itself and has a market share of 20 percent. The management of XYZ is planning to increase price of A from the current​ $6 per unit to​ $7 per unit. Timothy​ Walters, the marketing​ head, however, feels this is not a good idea because it will reduce quantity demanded drastically from the current​ 1,200 units to 900 units. His colleague and the head of the sales​ department, Jake​ Mayers, feels that the quantity demanded would only decline by 250 units. According to​ Jake, the firm can afford to increase the price because even after the price increase they would still have significant market share. Timothy and Jake most likely agree with which of the​ following?
A. The demand curve for A will shift to the left after the price increase.
B. The equilibrium market price is less than S6.
C. The demand for good A is elastic
D. The market share of XYZ will increase in the near future.
E. The total revenue will increase even if the price rises by $1.

Answer 1

Answer:

The correct answer is the option (C).

Explanation:

According to Timothy Walters, if price increases by $1 from $6 to $7 then quantity demanded will reduce from 1,200 units to 900 units.

This will lead to decrease in total revenue from (1,200 * $6) $7,200 to (900 * $7) $6,300.

According to Jack Mayers, if price increases by $1 from $6 to $7 then quantity demanded will reduce from 1,200 units to 950 units.

This will lead to decrease in total revenue from (1,200 * $6) $7,200 to (950 * $7) $6,650.

It can be seen that with increase in price, total revenue is decreasing in both cases. This happens when demand is elastic.

So,

Timothy and Jack will most likely to agree that the demand for good A is elastic.

Hence, the correct answer is the option (C).