The Impact of Changes in Price, Substitutes Price, and Income on Demand for ACME Widgets
a) What will happen to demand if the price of substitutes increases to 9.55 and average income rises to 5.3 while the price of ACME Widgets remains constant at 10?
b) How much can ACME increase their price while maintaining demand at the initial level of 4.7 thousand units per month?
c) What will be the change in ACME's monthly revenue if they follow the strategy mentioned in part b?
Answers:
(a) The approximate increase in demand when the price of substitutes and average income rise, but the price of ACME Widgets remains constant, can be calculated using the given information.
(b) To maintain demand at 4.7 thousand units per month, ACME can adjust their price within a certain range.
(c) By implementing the price adjustment strategy mentioned in part b, we can determine the impact on ACME's monthly revenue.
Based on the provided data, we can utilize the given demand function and partial derivatives to analyze the effects of changes in price, substitutes price, and income on the demand for ACME Widgets.
(a) To calculate the approximate increase in demand when ps increases to 9.55 and Y increases to 5.3, while p remains constant at 10, we can use the formula:
Δq ≈ (∂q/∂ps) * Δps + (∂q/∂Y) * ΔY
Substitute the values and calculate the change in demand accordingly.
(b) To determine the permissible increase in price by ACME while maintaining demand at 4.7 thousand units per month, we can use the elasticity of demand:
Δp ≈ - (∂q/∂p) * (p/q) * Δq
Calculate the change in price to understand the pricing strategy.
(c) By following the price adjustment calculated in part b, we can evaluate the change in ACME's monthly revenue using:
Change in monthly revenue ≈ Δp * q * p
These calculations provide insights into how ACME Widgets can navigate market changes and optimize their pricing strategy for revenue growth.