Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 7

You are a manager in charge of monitoring cash flow at a company that makes photography equipment. Traditional photography equipment comprises 40 percent of your revenues, which grow about 2 percent annually. You recently received a preliminary report that suggests consumers take three times more digital photographs than photos with traditional film, and that the cross-price elasticity of demand between digital and disposable cameras is -0.3. In 2012, your company earned about $600 million from sales of digital cameras and about $400 million from sales of disposable cameras. If the own price elasticity of demand for disposable cameras is - 2, how will a 4 percent decrease in the price of disposable cameras affect your overall revenues from both disposable and digital camera sales?