RSP:

1. List the factors that contributed to the slowdown in sales and revenue growth for
RSP. What strategies were being considered by the company’s CEO and CFO? Do you
think these are reasonable first steps? Comment briefly. [5]

Increased competition from new players in the region, Lower solar panel sales, failure to
adapt to 1-day installation which is being offered by the competitors’, and not able to
implement the environmental movements are some of the factors that contributed to the
slowdown in sales and revenue growth for RSP.

2. Derive an expression for the firm’s demand curve based on the information provided
in Exhibit 2 of the case. Make sure that your expression is of the form Q = a- bP. [5]

As per exhibit 2, the Installation price(P) and Solar panel units(Q) is plotted on graph as
follows:
Q P
300 Units $15000
420 Units $13500
540 Units $12000

When the numbers are plugged in the equation Q=a-bP for any 2 different points on the graph
Ex: 300= a-b(15000) & 540= a-b(12000). Solving the equation yields the value of b=0.08 and
a=1500. Therefore, the equation is Q=1500-0.08P.

3. The CFO, Johnny Urbane, is considering a price cut from the current level of $15,000
per installation to $13,500. Calculate the price elasticity of demand (PED) associated
with this proposed price cut. Report the PED using both the standard method and the
mid-point method. [5]

PED calculation using the standard method:

% change in price= (-1500/15000)*100= -10%

% change in quantity= (120/300)*100=40%
PED=%Q / %P = 40%/-10%= -4.00

PED calculation using the mid-point method:

% change in price= (-1500/14250)*100= -10.53%

% change in quantity= (120/360)*100= 33.33%

PED=%Q / %P = 33.33%/ -10.53% = -3.17

4.Does your calculation of the PEDs above using both methods justify the price cut?
What will be the projected change in revenues for RSP, in percentage change terms? [5]

The PED values using both the methods are greater than 1, which explains the elastic nature
of the solar panel market. So, any change in the price(+/-) will yield a more than
proportionate change in the quantity demanded(-/+).

So, the Price cut is justified by the elastic PED values as the competitors are able to deliver
and capture the market which led to a stagnated revenues for RSP. So, a price cut will help to
boost the demand for RSP products there by enhancing the revenue. But, other factors also
need to be taken into consideration like reduction of installation time to one-day. This might
also help to boost revenues more and consolidate more market share as there will be a level-
playing field in terms of installation time.

5.Calculate the point price elasticity of demand at the following points on the demand
curve: (i) Q = 300, (ii) Q = 420, (iii) Q = 540. What pattern emerges from your
calculations? Explain the intuition behind this pattern. [5]

Point price elasticity of demand at a given point on demand curve is denoted by: = -b (P/Q)

(i) Q=300, b=0.08, P=$15000 => = -0.08(15000/300) = -4.00

(ii) Q=420, b=0.08, P=$13500 => = -0.08(13500/420) = -2.57
 (iii) Q=540, b=-0.08, P=$12000=> = -0.08(12000/540) = -1.78
From the above calculations, it can be deduced that the price elasticity of demand for solar
panels decreases with the reduction in price and increase in quantity. This can be primarily
attributed to low/no competition at such low price points where the firm can have more room
to play with pricing with less effect on the demand thereby improving the revenue stream.

6.Now suppose the CFO, Johnny Urbane, makes an additional recommendation to the
CEO Barbara Johnson: “Following the price cut to $13,500, we should think about
being even more aggressive down the road, to increase our market share and ward off
any competition. Let’s think about a future price cut to $6,000.” Barbara, who is also
currently enrolled in an Executive MBA program and is in her Managerial Economics
course, starts wondering if this recommendation would be something that would be
supported by her understanding of the price elasticity of demand and firm revenues.
She asks Urbane to look at two things: (i) the contribution margins at the three price
points of $15,000, $13,500, and $6000, using the average installation cost provided in
Exhibit 1 of the case (also mentioned in the main body of the case), and (ii) a
comparison of the point price elasticities of demand at the first discounted price of
$13,500 and the proposed future price of $6,000. Do these calculations on Johnny
Urbane’s behalf. Upon seeing them, do you think Barbara Johnson would support his
recommendation? Why or why not? Explain based on your understanding of these
concepts. [5]

Average installation cost @ Marginal Cost(MC)= ($3000/KW)*(5KW)*(1-0.3)= $10500

Contribution Margin=(P-MC)/P => @ P=$15000 is (15000-10500)/15000= 0.3

@ P=$13500 is (13500-10500)/13500= 0.22
@ P=$6000 is (6000-10500)/6000= -0.75

Point price elasticity of demand at a given point on demand curve is denoted by: = -b (P/Q)

PPED@ $13500 is Q=1500-0.08(13500)= 420. Therefore, =(-0.08)*(13500/420)= -2.57

PPED@ $6000 is Q=1500-0.08(6000)=1020. Therefore, =(-0.08)*(6000/1020)= -0.47

From the above calculations, it can be understood that the PPED has moved from inelastic to
elastic in nature as the price point gets too low. But, the price elasticity is not the only
determining factor to reduce the prices. Having a negative contribution margin leads to
having more costs than revenues which can lead to firm failure. So, the proposed future price
of $6000 is not economically viable and thus should not be pursued at a future point in time.