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Stay Even Chapter 3 Managerial Economics
Stay Even Chapter 3 Managerial Economics
Stay-even analysis tells you how many unit sales you can lose before a price increase becomes
unprofitable. it shows whether increase or decrease in price is profitable.
Formula:
Stay-even quantity = %ΔP ___
(%ΔP + Contribution Margin)
Contribution Margin = (P-MC)_________
P
Comparing the stay-even analysis and the predicted Δ in quantity (using elasticity)
Decision is:
If the predicted quantity is less than the stay-even quanity, then the price increase will likely be
profitable, and vice versa
If:
e(%ΔPrice) < %ΔP _ = change in price is profitable
(%ΔP + Contribution Margin)
in comparing:
decrease in quantity = positive
increase in quantity = negative
The stay even quantity for a 5% price increase for a firm with a 40% contribution margin and elasticity is
-2.
Stay-even quantity = 5% ___
(5% + 40%)
Stay-even Quantity = 11.1% decrease;
11.1 = no change in profit
Since
11.1% > 10% = the change in price is profitable
The stay even quantity for a 5% price increase for a firm with a 40% contribution margin and elasticity is
-2.
Stay-even quantity = 11.1% increase