SUMMARY AND CONCLUSION

  The price elasticity of demand for a product holds significant implications for managers considering a price reduction in an effort to improve the net income for the stockholders. This paper derives a constraint on the price elasticity under which the net income would increase after a price cut. The optimum level of price reduction is also shown, which maximizes the wealth of the stockholders. In addition, this paper identifies the condition, under which the profit margin increases after a price cut, to contend that a low profit margin is not always bad for the stockholders. The implication of this condition is that, even if the profit margin decreases, a price cut is still worthwhile as long as the net income increases.

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