Demand Theory

Demand Theory

Mr. Jones was recently named assistant-manager in a company where it produces Y-phone 5G, the newest technology in Canada. The product is ready to be selling all around the world; however, Mr. Jones has not yet set a price for his product. After many weeks of thought, he finally finds out a price for the Y-phone 5G: $750 each. He based his calculation on the demand curve of this kind of product which is

P = 2,500 – 70Q

where P is the price and Q is the number of Y-phone 5G sold per month.

a) The manager of this corporation is wondering if the price set by Mr. Jones was too low or too high. How can he verify if the price set has to be change to improve the total revenue?

b) After several months, the Y-phone 5G is doing well. Nevertheless, the manager is not satisfied by the profit made and asks Mr. Jones if it would be a good idea to spend more money on advertisement or not. Knowing that the demand function for Y-phone 5G is

Q = 700 -50P + 300I + 0.39A

and that the amount of advertising is $5 per unit of this product, should Mr. Jones advertise more on this new technology?

c) How can Mr. Jones determine if the product's price is elastic or inelastic without making any calculation?

Answers

a) To verify if the price set has to increase or to decrease for the improvement of the total revenue, the price elasticity of demand has to be known.

• Considering the demand curve (P = 2,500 – 70Q) and the price set ($750), it is possible to find the number of Y-phone 5G sold per month:

750 = 2,500 – 70Q