When price of watch was increased by 25% the quntity sold was decresed by 20%.what was the net effect
Answers
Answer:
mark as brilliant answer
follow also
Explanation:
In economics, which I’ve taught many times before on the college-level, this is something called the Total Revenue (TR) Test. So when you’re talking about price elasticity and the effect on revenues, this is the kind of problem you’ll encounter.
TR = total revenue = price x quantity
TR = (100% - 25%) P x (100% + 20%)Q
TR = 75%P x 120% Q = 0.75 x 1.2 = 0.9 = 90%
So a 25% decrease in price and a corresponding 20% increase in sales would lead to a your new revenue being 90% of what it previously was. Translation, a 10% drop or loss in revenue!
We can illustrate this with a numerical example. Let’s say our original price was $10 and we sold 20 at this price. TR = $10 x 20 = $200. Now we cut our price by 25%, which would lower it down to $10 x 0.75 = $7.50. And our new sales would increase by 20%, which means sales goes up by 20 x 20% = 4.
Our new TR with a $7.50 price and 24 being sold =$ 7.50 x 24 = $180. So revenue fell by $20. Percentage-wise, this would be $20 divided by our original $200 revenue = 10%. So we end up making less money here because the increase in sales is not enough to offset the bigger drop in price.