Question: Unique is a leading manufacturer of powerful fully-loaded super light-weight laptop personal computers. Demand for Unique computers is tied to the overall pace of business sales and, therefore, is sensitive to changes in national income. The personal business computer industry is highly competitive, so Unique's demand is also very price-sensitive.
During the past year, Unique sold 550,000 fully-loaded super light-weight personal computers at an average price of $4,000 per unit. This year GDP per household is expected to fall from $58,800 to $53,200 as the nation enters a steep recession. Without any price change, Unique expects current-year sales to fall to 450,000 units.
Q1. Calculate the implied arc income elasticity of demand.
Q2. Given the projected fall in income, the sales manager believes that the current volume of 550,000 units could be maintained only with a price cut of $500 per unit. On this basis, calculate the implied arc price elasticity of demand.
Q3. Holding all other things equal and unchanged, would a further increase in price result in higher or lower total revenue?