You are a division manager at Toyota. If your marketing department estimates that the
semiannual demand for Highlander is Q = 60,000 −0.75P, what price should you charge
in order to maximize revenue from sales of the Highlander? Use the price elasticity of
demand in answering this question.
The Potomac Range Corporation manufactures a line of microwave ovens costing $400
each. Its sales have averaged about 5,500 units per month during the past year. In
August, Potomac’s closest competitor, Spring City Stove Works, cut its price for a closely
competitive model from $580 to $500. Potomac noticed that its sales volume declined to
4,000 units per month after Spring City announced its price cut.
What is the arc cross elasticity of demand between Potomac’s oven and the competitive
Spring City model?
Would you say that these two firms are very close competitors? What other factors could
have influenced the observed relationship?
If Potomac knows that the arc price elasticity of demand for its ovens is
2.5, what price