Question

University of Richmond Professor Erik Craft analyzed the states’ pricing of vanity plates. He found that in California, where vanity plates cost an average of $28.75, the elasticity of demand was 0.52. In Massachusetts, where vanity plates cost $50, the elasticity of demand was 3.52.

1.) Assuming vanity plates have zero production cost and his estimates are correct, was each state collecting the maximum revenue it could from vanity plates? Explain your reasoning.

a.)Neither state is maximizing revenue. Maximum revenue is collected when elasticity is 1.

b.)Massachusetts is maximizing revenue but California is not because revenue is only maximized when elasicity is greater than 1.

d.)Neither state is maximizing revenue. Maximum revenue is collected when elasticity is zero.

2.) What recommendation would you have for each state to maximize revenue?

I would recommend that Massachusetts

b.) Lower its price

c.) not change its price

and California ___

a.) raise its price

c.) not change its price

Can anyone help please? These are the only options.

Answer 1

1.) Assuming vanity plates have zero production cost and his estimates are correct, was each state collecting the maximum revenue it could from vanity plates? Explain your reasoning.

answer is: a.) Neither state is maximizing revenue. Maximum revenue is collected when elasticity is 1.

The reason for this is if the prices are way too high then the demand become elastic and consumers price sensitive, so many consumers will pass on the opportunity to buy and revenue would be less while on the other hand, when prices are too low, demand becomes inelastic and consumers are not price sensitive.Eg: If price of a needle increases, one wont be bothered much. But the revenue here also would not be maximized as prices are too low to realize the full capacity.

Elasticity when equal to 1 will ensure Maximum Revenue as the firm is able to sell the gods to most of the consumers under or equal to their willingness to pay and thus is able to maximize profits.

Price	Quantity	Total Revenue	Elasticity
8	5	40	>1
6	7	42	=1
3	12	36	<1

2.) What recommendation would you have for each state to maximize revenue?

I would recommend that Massachusetts

answer is: b.) Lower its price

Lowering the price will let the firm able to capture more market and reduce the price sensitivity of the consumers.

and California ___

answer is: a.) Raise its price

Raising the price would allow it to capture more revenue from each unit sold and maximise total revenue.