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managerial economics

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1. JQ sells ties and currently has sales of 1,200 units a month, producing a revenue of £36,000. It competes with KR, who is now considering a price cut of 25%. The PED for JQ is –1.5 and the CED between the two products is 0.8.

a) Calculate the effect of KR’s price cut on the sales volume and revenue of JQ.

b) Assuming KR does cut its price by 25%, determine the price that JQ would have to charge to restore its sales volume to its previous level.

c) Calculate the effects of the decisions in a) and b) above on profit compared with the original profit, assuming that JQ’s ties cost £20 to produce. Is JQ’s retaliatory price cut a good decision?

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