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Assume that revenue at a smartphone manufacturer was $5 billion in 2018, up 55 percent from 2017. Management attributes the increase in revenues to a 66 percent increase in shipments (quantity), despite a 32 percent decrease in the average selling price of the phones. What is the price elasticity of demand for the phones and is this consistent with the increase in revenue? Please give an explanation and show all calculations.
Here is my work.
Given the available information, the own price elasticity of demand for the smartphone manufacturer, is EqP = 66 / (-32) = -2.06.
Since this number is greater than one in absolute value, demand is elastic.
Yes, this is consistent with the increase in revenue because in accordance with the total revenue test, a reduction in price will increase revenues.
Any help is greatly appreciated.
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