On average, EPX - (3 + 2)/2 - 2.5. Because EPX > 0, sports and dress watches are substitutes.

ST5.2 Cross-Price Elasticity. Surgical Systems, Inc., makes a proprietary line of disposable surgical stapling instruments. The company grew rapidly during the 1990s as surgical stapling procedures continued to gain wider hospital acceptance as an alternative to manual suturing. However, price competition in the medical supplies industry is growing rapidly in the increasingly price-conscious new millennium. During the past year, Surgical Systems sold 6 million units at a price of $14.50, for total revenues of $87 million. During the current term, Surgical Systems' unit sales have fallen from 6 million units to 3.6 million units following a competitor price cut from $13.95 to $10.85 per unit.

A. Calculate the arc cross-price elasticity of demand for Surgical Systems' products.

B. Surgical Systems' director of marketing projects that unit sales will recover from 3.6 million units to 4.8 million units if Surgical Systems reduces its own price from $14.50 to $13.50 per unit. Calculate Surgical Systems' implied arc price elasticity of demand.

C. Assuming the same implied arc price elasticity of demand calculated in part B, determine the further price reduction necessary for Surgical Systems to fully recover lost sales (i.e., regain a volume of 6 million units).

ST5.2 Solution

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