The Stop Decay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units… 1 answer below »

Question 1

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? (3 marks)

(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. (3 marks).

(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)? (2 marks)

(iv) Is the result in part (iii) necessarily desirable? What other factors would have to be taken

into consideration? (2 marks)

Question 2

(a) Explain the differences between accounting profit, economic profit and normal profit

(3 marks).

(b) Suppose that due to changing tastes there is a sudden increase in demand for emu

meat.

(i) Assuming the costs of emu meat production remain unchanged, what would you expect

to happen to profits in the emu meat industry? (2 marks)

(ii) Assuming that there are low barriers to entry into the emu meat industry, explain why

resources would move into this industry? (2 marks).

(iii)In the long run, what would you expect to happen to profits in this industry? (1 mark).

(iv) Will normal profits occur in this industry in the long run? If so, explain why?

 

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