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?

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?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter6: Elasticities

Section: Chapter Questions

Problem 12P

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