Question 8

The ABC a variety of kites selling for $3.98 each. Sales have averaged 20,000 units per month during the last year. Recently ABC's closest competitor, XYZ, cut its prices on similar Kites from $4.49 to $3.59. ABC noticed that its sales declined to 16,000 units per month after the price cut.

(a)What is the arc cross elasticity of demand between ABC's and XYZ's Kites? Explain.

(b)If ABC knows the arc price elasticity of demand for its Kites is -2.6, what price would they have to charge in order to obtain the same level of sales as before XYZ's price cut? Explain in details.