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Problem: The Stop Decay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per month over the last year. Recently, its closest competitor Decay Fighter reduced the price of its electric toothbrush from $35 to $30. As a result, Stop Decay's sales declined by 1,500 units per month.
(i) What is the cross price elasticity of demand between Stop Decay's toothbrush and Decay Fighter's tooth brush? Use the averaging formula. What does this indicate about the relationship between the two products?
(ii) If Stop Decay knows that the price elasticity of demand for its toothbrush is -1.5, what price would Stop Decay have to charge to sell the same number of units as it did before the Decay Fighter price cut? Assume that Decay Fighter holds its price of its toothbrush constant at $30 Use the averaging formula.
(iii) What is Stop Decay's average monthly total revenue from the sale of its electric toothbrushes before and after the price change determined in part (ii)?
(iv) Is the result in part (iii) necessarily desirable? What other factors would have to be taken into consideration?
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