The Stop Decay Company sells an electric toothbrush for $25. Its sales have averaged
8,000 units per month over the last year. Recently, its closest competitor Decay Fighter
reduced the price of its electric toothbrush from $35 to $30. As a result, Stop Decay’s sales
declined by 1,500 units per month.
(i) What is the cross price elasticity of demand between Stop Decay’s toothbrush and Decay
Fighter’s tooth brush? Use the averaging formula. What does this indicate about the
relationship between the two products? (3 marks)
(ii) If Stop Decay knows that the price elasticity of demand for its toothbrush is -1.5, what
price would Stop Decay have to charge to sell the same number of units as it did before the
Decay Fighter price cut? Assume that Decay Fighter holds its price of its toothbrush constant
at $30 Use the averaging formula. (3 marks).
(iii)What is Stop Decay’s average monthly total revenue from the sale of its electric
toothbrushes before and after the price change determined in part (ii)? (2 marks)
(iv) Is the result in part (iii) necessarily desirable? What other factors would have to be taken
into consideration? (2 marks)
(a) Explain the differences between accounting profit, economic profit and normal profit
(b) Suppose that due to changing tastes there is a sudden increase in demand for emu
(i) Assuming the costs of emu meat production remain unchanged, what would you expect
to happen to profits in the emu meat industry? (2 marks)
(ii) Assuming that there are low barriers to entry into the emu meat industry, explain why
resources would move into this industry? (2 marks).
(iii)In the long run, what would you expect to happen to profits in this industry? (1 mark).
(iv) Will normal profits occur in this industry in the long run? If so, explain why?