In 2003, when music downloading first took off, Universal Music slashed the prices of CDs from an average of $21 to an average of $15. The company said that it expected the price cut to boost the quantity of CDs sold by 30%.
a. What was Universal Music's estimate of the price elasticity of demand for CDs?
b. Given your answer to part (a), if you were making the pricing decision at Universal Music, would you cut the price, raise the price, or leave the price unchanged? Explain your decision.