Joe, if another phone service provider enters the market and forces Connecting U to drop the price of a gigabyte even further than $16, let’s say they drop it by an additional 22.2%, what will happen to your quantity demanded of data

Joe, if another phone service provider enters the market and forces Connecting U to drop the price of a gigabyte even further than $16, let’s say they drop it by an additional 22.2%, what will happen to your quantity demanded of data?

The correct answer and explanation is:

Correct Answer: The quantity demanded of data will increase.

Explanation (300 words):

When the price of a good or service decreases, the quantity demanded generally increases — this is a basic principle of the law of demand in economics. In this scenario, if Connecting U originally dropped its price to $16 per gigabyte and is now forced to reduce it by an additional 22.2%, that brings the new price even lower.

Let’s calculate the new price:

• 22.2% of $16 = 0.222 × 16 = $3.55 (approx)
• New price = $16 – $3.55 = $12.45 per gigabyte

At $12.45 per gigabyte, data becomes more affordable, and customers like Joe are likely to increase their data usage. This happens because:

1. Lower cost per unit makes additional consumption more attractive.
2. The marginal utility per dollar spent on data increases, encouraging higher consumption.
3. Substitution effect: If Joe was previously using alternatives like Wi-Fi to limit mobile data use, the cheaper data price may lead him to rely more on mobile data.
4. Income effect: With data being cheaper, Joe effectively has more disposable income left, which could be redirected toward purchasing more data.

In competitive markets, price elasticity of demand also plays a role. If demand for data is elastic (meaning consumers are sensitive to price changes), then a 22.2% price drop is likely to lead to a more-than-proportional increase in quantity demanded. Given that mobile data is a frequently used commodity and price-sensitive for many consumers, it is reasonable to expect that Joe — like most consumers — will respond to a lower price by increasing his consumption.

In summary, when the price of data drops further to $12.45, Joe’s quantity demanded will increase, possibly significantly, depending on his usage habits and how price-sensitive he is.