Final answer:
If International Video Machines, Inc. lowers the price to $600, the new quantity sold will increase to 1500 units, and total revenue will be $900,000. To determine whether this price change will increase profit, the company needs to analyze production costs.
Step-by-step explanation:
International Video Machines, Inc. is considering lowering the price of its commercial video recording device from $800 to $600. With a price elasticity of demand estimated to be -2, we use the formula for percentage change in quantity demanded:
Percentage change in quantity demanded = (Price elasticity of demand × Percentage change in price).
Here, the percentage change in price is (($800 - $600) / $800) × 100 = 25%. Given the price elasticity of -2, the percentage change in quantity demanded is -2 × 25% = -50% (since elasticity is negative, this indicates an increase).
The original quantity sold is 1000 units, so the new quantity sold will be 1000 units + 50% of 1000 units = 1000 + 500 = 1500 units.
To calculate the new level of total revenue, we multiply the new quantity by the new price:
Total Revenue = Quantity × Price = 1500 units × $600 = $900,000.
Before deciding on a price decrease, International Video Machines, Inc. needs additional information about the costs associated with producing the video recorders, including variable and fixed costs, to determine whether the decrease in price will increase the firm's profit.