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BVO is a small business, which manufactures and sells a number of products, including product X( a relatively low-value item). BVO has recently been considering its pricing policy for this product.
It has estimated that if it raises the current selling price(per unit) of product X from $1 to $1.5,annual demand will drop from 100,000 units to 90,000 units.
BVO is uncertain of the implications of this for its product, or what might be causing the current level of price elasticity.
Which FOUR of the following options could reasonably be inferred from the above information?A. The price elasticity of demand for product X is 5.
B. Product X is unit elastic.
C.Product X may be a product that customers buy out of habit
D. Product X may have few, if any, substitutes
E. The price elasticity of demand for product X is 0.28
F. Product X may see a sharper fall in demand if the price rise lasts for a long period
G. Product X has a price elasticity of demand of 0.2
H. Product X would be more profitable if the price was cut rather than raised.The correct answer are C, D, F, G.
My answer are C,D,G,Hplease kindly inform why H is not the correct answer,but F is?
PED refers only to price and quantity. It says nothing about costs or profitabiity. If you cut the price you will sell more but that could mean a greater loss if the products are not profitable. eg made for $5/unit but selling for $1/unit.
F is certainly not a standard PED-type question so needs some thought. Think about real life price rises. If a company raises its price then this makes it easier to be profitable per unit sold or it might make more profit per unit. If the profit per unit becomes higher this can draw competitors into the market who will be able to steal share from BVO by selling at a lower, yet still profitable, price.
Oooh I get the meaning now, I have been struggling to find correct answers for this question, I thank you for the explanation.
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