Problem:
Viewpoint. According to Henry Ford, "it is better to sell a large number of cars at a reasonably small margin than to sell fewer cars at a larger margin of profit. Bear in mind that when you reduce the price of the car without reducing the quality you increase the possible number of purchases."
(a) In 1909, Ford introduced the Model T at a price of $900; sales were 58,000 cars. In 1914, the price was $440.00; about 470,000 cars were sold. If the demand curve for the Model T remained constant during 1909-1914, what was the price elasticity of demand?
(b) Do you think that the demand curve remained constant during 1909-1914? If not, do you think that it shifted to the right or to the left? Why?
(c) Do price reductions always result in higher profits? For example, if the demand for a firm's product is price inelastic, will the firm increase its profits by cutting its price? Explain.