Problem on Elasticity
You are a manager in charge of monitoring cash flow at an automobile company that
makes cars. Basic segments of the hatchback and sedan cars (You can call them small cars)
comprise 40 percent of your revenues, which grow about 2 percent annually. You recently
received a preliminary report that indicates consumers buy two times more SUVs and MPVs
(You can call them big cars) than the basic cars, and the cross price elasticity of demand
between big cars and small cars is −0.3. In 2022, your company earned Rs. 600 million
from sales of big cars and about Rs. 400 million from sales of small cars. If the own price
elasticity of demand of small cars is −2, how will a 4 percent decrease in the price of small
cars affect your overall revenues from both small and big cars?
1