Section 3 – Problem Solving
Solve all parts of the following problem. Multiple steps may be required. Show all mathematical calculations in full; you may use the blank back pages of the test paper.
Scenario: Demand Elasticity
In late April 2021, Facebook launched their new virtual reality headsets, Oculus II, for a retail price of $400. Based on pre-orders and first-week sales, Quantity Demanded was measured at 12,000 units for that month. But in July 2021, a rival French firm launched a competitor headset, Verne, which was retailing for $350, and quickly began outselling the Oculus. Quantity Demanded for the Verne was measured at 8,000 units during that month, while Oculus sales lowered to the same level, 8,000 units, the same month. The price of the Oculus did not change at all.
1) When the Verne headset launched, explain its effects on overall market demand for virtual reality headsets?
Begin Writing Here.
2) Describe how the demand curve for the Oculus VR set would appear in April, and how it would appear in July, after the launch of its competitor VR set, the Verne. The horizontal axis is Quantity Demanded, and the vertical axis is the Oculus’ price in $. You may also create a graph, representing the data, drawing the two demand curves.
Begin Writing Here.
Or Draw a Graph Here (optional).
3) Calculate the Cross-Price Elasticity for virtual reality headsets, comparing the Quantity Demanded when the Verne debuts July 2019.
Show Your Workings Here.
What does this elasticity measurement show about how the prices of Oculus, Verne, and other VR headsets would behave on the market?
4) In response to the Verne’s launch, Oculus reduces its price to $350 in August 2019. After this, the Quantity Demanded for the Oculus rises from 8,000 to 9,000. Verne sales remain at 8,000. Calculate the general price elasticity for Oculus between its launch in April and its price change in August.
Show Your Workings Here.
What does the specific price elasticity of Oculus show about what Facebook’s options are to boost Oculus sales through techniques like price changes?
Begin Writing Here.
5) Explain what the above results mean for Facebook / Oculus’ overall market strategy. Can they regain their dominant position in the marketplace before Verne entered? Why or why not?
Begin Writing Here.