Problem:
The Stopdecay Company sells the electric toothbrush for $25. Its sales have aver-aged 8,000 units per month over precedent year. Freshly, its closest competitor, Decayfighter, decreased the price of its electric toothbrush from $35 to $30. Consequently, Stopdecay’s sales are declined by 1,500 units per month.
Required:
a. What is the arc cross elasticity of the demand between Stopdecay’s toothbrush and Decayfighter’s toothbrush? What does this indicate about the relation-ship between the two products?
b. If Stopdecay knows that arc price elasticity of demand for its toothbrush is −1.5, what price would Stopdecay have to charge to sell the similar number of units as it did before the Decayfighter price cut? Suppose that Decayfighter holds the price of its toothbrush steady at $30.
c. What is Stopdecay’s average monthly total revenue from sale of electric toothbrushes before and after price change determined in part (b)?
d. Is the result in part (c) essentially desirable? What other factors would have to be taken in consideration?