Question: Tess is the product manager for the Toyota Prius. Honda has recently launched its own hybrid car which has proved to be a capable competitor to the Prius. Since the Honda launch, Tess has noticed that her sales have been slowing. She is considering dropping her price from its current level $24,000 to a new reduced level $18,000 in order to better compete with the Honda hybrid which is priced at $18,500. Before she does so, she wants to understand how price sensitive consumer demand is for the Toyota Prius.
At the $24,000 price, Tess has been able to sell 60,000 units per year. When the Prius was first launched, it was priced much higher at $30,000. During its first year at that price point, it sold 40,000 units.
What is the price elasticity of the Toyota Prius at the $24,000 price level? Is the Prius price elastic or price inelastic? How many units should Tess expect to sell at the $18,000 price point, assuming a linear demand curve?