In 2003, when music downloading first took off, Universal Music slashed the average price of a CD from $21 to $15. The company expected the price cut to boost the quantity of CDs sold by 30 percent, other things remaining the same.
a. What was Universal Music’s estimate of the price elasticity of demand for CDs?
b. If you were making the pricing decision at Universal Music, what would be your pricing decision? Explain your decision.