Elasticity Problem

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asldol

June 20, 2018 00:52

Microsoft wants to calculate the effect of a worldwide 5 percent price cut on its sales of Excel to clients in different countries. Microsoft sells Excel at different prices in US, Japan and Europe. Before the price cut US sales were twice sales in Japan and Europe each. If the price of elasticity of demand in the US, Japan and Europe are -3, -4, and -2 respectively, the worldwide sales rise by

A) 10 percent

B) 15 percent

C) 20 percent

D) 25 percent

E) none of the above

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asldol

June 20, 2018 01:13
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We know that
EP =
%DQ
%DP
If %DP = 􀀀5%, then %DQUS = 15%; %DQJ = 20%;%DQE = 10%;
The total increase (in percentage) in output is
%DQ = 0.4 15 + 0.2 20 + 0.2 10 = 15%
Answer: 15%

Update: Can you explain to me why "Before the drop in price, the market share of each location as a percentage
of the sum of output in Europe, Japan and the US is: QUS = 40% ;
QJ = 20%; QE = 20%"

The sales rise
US= 5x3=15%
Japan=5x4=20%
and Europe=5x2=10%

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