AmanJaya Sdn Bhd has initially established soft drinks outlets in shopping malls. The firm hires a business analyst to determine the demand for its soft drinks in shopping malls. After a few months, the analyst tells the company that demand for the soft drinks in shopping malls is given by the following equation:

Qd =5000-25Pa +30Pb +0.5I

where, Pa = Price per unit of AmanJaya Sdn Bhd soft drinks, Pb = Price per unit of the competitor's soft drinks, and I = Income of the consumer

AmanJaya also has an inclination to set up soft drink outlets in petrol stations. Later the firm sets up soft drink outlets in a petrol station. The petrol station was located at a place where there were no other soft drink outlets within a radius of 5 km. In mid-2018, the firm offered a discount of 10% and sales jumped from 700 bottles per month to 1500 bottles per month. The discount was withdrawn subsequently.

Happy by the response, six months later, the owner decided to permanently reduce the price of soft drinks by 10%. Meanwhile, two new soft drink outlets were set up in the area. This time to the owner's dismay, the sales went up marginally from 700 bottles per month to 800 bottles per month, and since a reduction in the price had already been announced, the owner could not revert to the old price.

Questions:

(a)Discuss whether the pricing strategy adopted by the company in the petrol station is right or not.

(5 marks)

(b)Calculate price elasticity of demand for soft drinks in petrol station outlets in mid-2018.

(2 marks)

(c)What factors have changed since then and what is the effect of these changed factors on the price elasticity, and the resultant new price elasticity?

(3 marks)