2. PR sells phones for £400 and has observed a recent drop in sales from 1,500 units a month, reducing its revenue by £120,000. This has occurred because a competitor has just reduced its price by 20%. PR wants to restore its sales volume to its previous level, and has estimated its price and cross elasticities at -1.4 and 0.8 respectively. The phones have a marginal cost of £280.
a) Calculate the sales level of PR after the reduction in the competitor’s price, assuming PR maintains its price.
b) Calculate the necessary price for PR to charge to achieve its objective, assuming the competitor’s price reduction.
c) Calculate the effects of the decisions in a) and b) above on profit compared
