Question

The marketing people at Ben and Jerry's Ice Cream Company believe that if they lower the price of their Cherry Garcia flavor ice cream by 25 percent, the quantity demanded will increase by 5 percent. If they are correct in their belief, then__________

Answer 1

Answer:

The correct answer is: their total revenue will decrease if they lower the price.

Explanation:

A price elasticity equal to one means that sales go up (or down) by the same percentage as the price goes down (or goes up). In this case the total income will not be affected.

An elasticity greater than one means that sales (x) rise (or fall) in greater proportion than the price falls (or rises). In this case the total income goes up. An elasticity of less than one means that sales rise (or fall) in a smaller proportion to the percentage at which the receipt falls (or goes up). In this case the total income decreases. Therefore, to know the result or the effects of a price variation it is very important to know the elasticity.

When the company varies the price of a good, you should consider studying the possible effects of that variation on the demand of the other products of the company.

In summary, we can say that the price drop as a marketing strategy is only usable when the demand for the product is relatively elastic and the company does not compromise its profitability; while the company when it starts a price increase must know the possible responses of the competition, because if it is chosen, it knows that the market will respond especially if there is a leader who usually sets the guidelines when setting prices and conditions of sale, thereby facilitating stability to the sector.