BAD Enterprises is considering increasing the price of its harmonicas, currently $20, by 25 per cent. BAD’s current revenue is $12,000 a month, and the PED for its harmonicas is estimated to be 1.8. a. Calculate the effect of the price change on BAD’s revenue. b. BAD now considers increasing its advertising budget to restore its sales revenue to its previous level. BAD is currently spending $1,500 a month on advertising and estimates its AED to be 1.5. What will its new budget have to be? c. What can you say about what will happen to profit in both (a) and (b) compared with the original level of profit?
3.1 BAD Enterprises is considering increasing the
currently $20, by 25 per cent. BAD’s current revenue is $12,000 a month,
and the
a. Calculate the effect of the price change on BAD’s revenue.
b. BAD now considers increasing its advertising budget to restore its sales
revenue to its previous level. BAD is currently spending $1,500 a month
on advertising and estimates its AED to be 1.5. What will its new budget
have to be?
c. What can you say about what will happen to profit in both (a) and (b)
compared with the original level of profit?
3.5 MK Corp estimates that its
Q ¼ 400 12:5P þ 25A þ 14Y þ 10P
where Q is the quantity demanded per month, P is the product’s price
(in $), A is the firm’s advertising expenditure (in $’000 per month), Y is per
capita disposable income (in $’000), and P * is the price of AJ Corp.
a. During the next five years, per capita disposable income is expected to
increase by $5,000 and AJ is expected to increase its price by $12. What
effect will this have on the firm’s sales volume?
b. If MK wants to change its price by enough to offset the above effects, by
how much must it do so?
c. Compare the profitability of maintaining sales volume by either chan ging price or changing advertising spending.
d. If MK’s current price is $60 and it spends $10,000 per month on adver tising, while per capita income is $25,000 and AJ’s price is $70, calculate
the price elasticity of demand with the price change.
e. What can be said about the effect of the above price change on profit?
f. What can be said about the relationship between the products of MK and AJ?
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