Sony is considering a 10 percent price reduction on its HD TV sets. If the price-elasticity coefficient for the sets in this price range is -0.75, then the price cut will cause:
A. Sales quantity to increase, and revenues to also increase
B. Sales quantity to increase, but revenues to decrease
C. Sales quantity to decrease, and revenues to also decrease
D. Sales quantity to decrease, but revenues to increase
The correct answer and explanation is:
Correct Answer: B. Sales quantity to increase, but revenues to decrease
The price-elasticity coefficient of demand measures how responsive the quantity demanded is to a change in price. A value of -0.75 means that for every 1 percent decrease in price, the quantity demanded increases by 0.75 percent. The negative sign indicates the inverse relationship between price and quantity demanded, which is typical for most goods.
In this case, Sony is considering a 10 percent price cut on its HD TV sets. With a price elasticity of -0.75, a 10 percent decrease in price will lead to a 7.5 percent increase in the quantity demanded. While this increase in quantity is helpful, it is not large enough to offset the reduction in price.
Revenue is calculated by multiplying price and quantity. If the percentage increase in quantity is less than the percentage decrease in price, the total revenue will decline. Since the elasticity is less than 1 in absolute value, the demand is considered inelastic. In an inelastic range, price and total revenue move in the same direction. Therefore, when price decreases, revenue also decreases.
This means that although more units of the product will be sold after the price reduction, the amount of money earned from those sales will be lower. Companies often analyze this relationship to decide whether a price change will benefit them financially. In this scenario, a price cut with inelastic demand will lead to higher sales volume but lower overall revenue.
Thus, the correct interpretation is that sales quantity will increase, but total revenues will fall, making Option B the most accurate answer.