Suppose that a new entry has decreased your demand elasticit

Suppose that a new entry has decreased your demand elasticity from –5 to –6 (made demand more elastic) and that your price, before the new entry, was $30.

You should adjust your price to ($?) due to the new entry and decreased demand elasticity.

Solution

We know that :

(P - MC) / P = 1 / | elasticity |

where | elasticity | = modulus of elasticity means if elasticity was -5 modulus of elasticity will be 5.

Use the above formula, using the values before the new entry, means P = $30 and elasticity = -5, we can find MC

(30 - MC) / 30 = 1/ 5

30 - MC = 6

MC = $24. so now we have MC.

Use this MC and new elasticity to find the price after new entry i.e., MC = 24 and elasticity = -6.

(P - 24) / P = 1/ 6

6P - 144 = P

5P = 144

P = $28.8

so you should adjust your price to $28.8 due to new entry an decreased demand elasticity.