You are a manager in charge of monitoring cash flow at a...

You are a manager in charge of monitoring cash flow at a major publisher. Paper books comprise 40 percent of your revenues, which grow about 2 percent annually. You recently received a preliminary report that suggests the growth rate in ebook reading has leveled off and that the cross-price elasticity of demand between paper books and ebooks is -0.3 . In 2016, your company earned about $$\$ 600$$ million from sales of ebooks and about $$\$ 400$$ million from sales of paper books. If the own price elasticity of demand for paper books is -2 , how will a 4 percent decrease in the price of paper books affect your overall revenues from both paper book and ebook sales?

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Key Concepts

Own Price Elasticity of Demand

This concept measures the responsiveness of the quantity demanded of a good to a change in its own price. A high (in absolute terms) own price elasticity indicates that even a small price change can lead to a significant percentage change in quantity demanded. In the context of the problem, knowing the own price elasticity is crucial for predicting how a change in the price of paper books will impact their sales volume and revenues.

Cross-Price Elasticity of Demand

This refers to the responsiveness of the quantity demanded for one good when the price of another related good changes. A negative cross-price elasticity signifies that the two products are complements, meaning that a price decrease in one may increase the demand for the other. This concept is important here to understand how a change in the price of paper books might also affect the sales (and thus revenue) from ebooks.

Revenue Composition Analysis

This involves analyzing the proportion of overall revenue contributed by different products or segments. Knowing the revenue shares of paper books and ebooks provides insight into the potential impact of price changes on overall revenue. It helps in assessing the weighted effect when combining responses from multiple segments with differing growth rates or demand sensitivities.

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