Cross-Price Elasticity
B. B. Lean is a catalog retailer of a wide variety of sporting goods and recreational products. Although the market response to the company's spring catalog was generally good, sales of B. B. Lean's $140 deluxe garment bag declined from 10,000 to 4,800 units. During this period, a competitor offered a whopping $52 off their regular $137 price on deluxe garment bags.
A. Calculate the arc cross-price elasticity of demand for B. B. Lean's deluxe garment bag.
B. B. B. Lean's deluxe garment bag sales recovered from 4,800 units to 6,000 units following a price reduction to $130 per unit. Calculate B. B. Lean's arc price elasticity of demand for this product.
C. Assuming the same arc price elasticity of demand calculated in part B, determine the further price reduction necessary for B. B. Lean to fully recover lost sales (i.e., regain a volume of 10,000 units).