he price for cigarettes sold by Big Tobacco Co Ltd was6.00 per packet in March 2018. During the month of March, the consumption of cigarettes was 1000 packets. However, the Board of Directors of Big Tobacco Co Ltd decided to increase the price by 25% during the month of April. As a manager you noted that price elasticity of demand was 0.8. As a manager Big Tobacco Co Ltd: Advise your management ofthe strategy that could be adopted by your firm to maintain sales. Also, advise your government on recommended interventions in the cigarette market.
he price for cigarettes sold by Big Tobacco Co Ltd was6.00 per packet in March 2018. During the month of March, the consumption of cigarettes was 1000 packets. However, the Board of Directors of Big Tobacco Co Ltd decided to increase the price by 25% during the month of April. As a manager you noted that
- Advise your management ofthe strategy that could be adopted by your firm to maintain sales.
- Also, advise your government on recommended interventions in the cigarette market.
Price elasticity of demand determines the responsiveness of percentage change in quantity demanded due to some percentage change in the price.
Total revenue is the total receipts collected by sale of goods and services.
The elasticity of demand is -0.8 and the increase in price is 25%.
The % change in quantity demanded is calculated as follows:
Therefore, quantity demanded decreases by 20%.
The new price is:
The new quantity is:
Total revenue before increase in price is:
Total revenue after price increase is:
As the total revenue remains the same, the manager should be indifferent between increasing the price or leaving price as constant.
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