Question
You are a manager in charge of monitoring cash flow at a toy retailer that sells some of its own toys as well as some
You are a manager in charge of monitoring cash flow at a toy retailer that sells some of its own toys as well as some from popular brands like Melissa & Doug. Online individual toy sales comprise 40 percent of your revenues, which grow about 4 percent annually (you also operate a few brick-and-mortar stores, which we'll ignore for the purposes of this question). You recently received a preliminary report from your website sales that suggests the growth rate in your Melissa & Doug brand total sales have leveled off, and that the cross-price elasticity of demand between your own branded toys and Melissa & Doug toys is -0.2. In 2021, your company earned about $4 million from sales of Melissa & Doug toys and about $2 million from sales of your own branded toys. If the own price elasticity of demand for your own branded toys is -3, how will a 4 percent decrease in the price of your own toys affect your overall revenues from both your own brand and your sales of Melissa & Doug branded toys?
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