The Prestige Office Equipment Company produces and sells different types of office furniture. One of the important items it sells is a high quality desk. During the past year, Prestige sold 5,000 of these at a price of $500 each. The contribution profit for this line of furniture last year was $700,000.
A consultant suggests that Prestige decrease the price of each desk by $30. In his opinion, another 500 desks could then be sold, and the profit would be maintained. A trade publication that employs an economist has estimated price elasticity of office furniture (including desks) to be about -1.8.
Assume the variable unit cost per desk in the coming year will remain the same. Evaluate the proposal. Be sure to include in your answer the price elasticity assumed by the consultant, as well as the published elasticity estimate