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

Answer 1

Answer:

B) The demand for good A is elastic.

Explanation:

Both Timothy and Jake believe that the demand is elastic, Timothy believes the PED = 1.75, while Jake believes the PED = 1.46. The difference is that Timothy believes the demand is more elastic.

Option A is not correct because Timothy believes total revenue will fall while Jake believes it will increase.

Option C is not correct because both believe that their market share will decrease.  

Option D is not correct because both Timothy and Jake are arguing about higher prices, not lower prices.

Option E is not correct because an increase inn the price of a good does not shift the demand curve, it moves the equilibrium point within the given demand and supply curves.