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Toys R Us of Arlington sells sports cars for little kids; during 2014 it sold a monthly average of 23,000 units for $13 per car. In early January 2015, Toys R Us major competitor, Walmart cut the price of its sport car toys from $15 to $12. The orders Toys R Us received for its own sports cars dropped sharply, from 23,000 per month to 13,000 per month for February and March 2015.
Calculate the cross elasticity of demand between Toys R Us sports cars and Walmart's sports cars during February and March. Are the two companies' sports cars strong or poor substitutes? Why? Explain. When Walmart dropped the price from $15 to $12, it realized that their sales of these cars changed from 15,000 to 25,000 units per month. Calculate the own price elasticity of Walmart's sports car toys and indicate if it is classified as inelastic, unit elastic or elastic. Why? What changes in revenues will Walmart expect as a result of the price change? Why?
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