A new car salesman wants to give a bonus of 2000 for cars t

A new car salesman wants to give a bonus of $ 2,000 for cars that sell for $ 24,000. He found that cars have a price elasticity of +.80. They usually lower 10%. Can you give the bonus? what would you recommend, based on the study carried out? Base your answer.

Solution

The price elasticity is 0.8 which means that with a% of decrease in pricec of of the car, the demand of car will be increased by 80% of a% of the output.

That is if the price gets lowered by 9% then the increase in demand of the car would be 80% of 9% which s lesser than 9%. Additionally 10% demand will be less. Thus the net change will be decrease in demand in next quarter.

This would reduce the revenue and hence the new salesman will not be in position of giving bonus.