Jim’s firm increased its total revenue by lowering the price of the product by five percent...

Jim’s firm increased its total revenue by lowering the price of the product by five percent last month. This month a 5% reduction in price has lead to a decrease in total revenue. There is no reason to suspect a change in demand for the product, all the shift variables have remained constant. Please explain this confusing situation to Jim.

Solutions

Expert Solution

There is a test called as total revenue test which explains that:

If price elasticity of demand is more than 1(Elastic) then it implies that price and Total revenue will move in opposite direction.
If price elasticity of demand is less than 1(inelastic) then it implies that price and Total revenue will move in same direction.
If price elasticity of demand is equals to 1(unit Elastic) then it implies that change in price will not cause any change in Total revenue.

So in previous month, there is an elastic demand for firm's product which cause increase in total revenue due to a 5% decrease in price and in this current month, there is an inelastic demand for firm's product which cause decrease in total revenue due to a 5% decrease in price. Jim's firm should focus on change in quantity demand which is caused by change in price and it must decide what to do by considering price elasticity of demand.

Rahul Sunny answered 2 months ago

Next > < Previous

Related Solutions

1) If a firm lowers the price of its product and as a result total revenue...

1) If a firm lowers the price of its product and as a result total revenue falls, we can conclude that the product's price is above the midpoint of its demand curve other things constant, the firm's profits will increase a demand is elastic in this price range the product is inferior goods demand is inelastic in this price range 2) According to Table below, what is the price elasticity of demand (using Midpoint method) when price rises from $8.50...

A firm has just increased its price by 4 percent over last year’s price, and it...

A firm has just increased its price by 4 percent over last year’s price, and it found that quantity sold decreased by 2 percent. a. What is its price elasticity of demand? Instructions: Enter your response rounded to one decimal place. The price elasticity of demand is . b. What additional information would you search for before you did your calculation?

A competitive firm sells its product at a price of $ 10 per unit. Its total...

A competitive firm sells its product at a price of $ 10 per unit. Its total is: TC = 5 -0.5q + 0.001q2(q square) where TC is total cost ($) and q is output rate (units per time period) a) Calculate the firm’s profit maximizing quantity. Is the firm earning a profit? b) Is the firm in the long run in part (a). If not, what do you think will happen in the longrun? c) What is the supply curve...

When the monopoly firm sells two units of its product, it earns total revenue of $260...

When the monopoly firm sells two units of its product, it earns total revenue of $260 and it incurs a total cost of $210. If its marginal revenue for the second unit was $110, what was the marginal revenue of the first unit? Group Choice Answers: $100 $150 $133 $220 There is not enough information to answer the question.

"Even if a firm may sell its product at a price less than the average total...

"Even if a firm may sell its product at a price less than the average total cost, it may not shut down its operation." Explain with reference to the shut-down point. please write out answer versus charting it

SHOW HOW A FIRM CAN MAXIMIZE TOTAL REVENUE BY PRICE DISCRIMINATING

1. A firm in perfect competition competes by lowering its price to sell more. Explain clearly...

1. A firm in perfect competition competes by lowering its price to sell more. Explain clearly why you agree or disagree with this statement.

A firm is considering renewing its equipment to meet increased demand for its product. The cost...

A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $ 1.88 million plus $ 111,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period. Additional sales revenue from the renewal should amount to $ 1.17 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 40 % of the additional sales. The firm is...

Suppose that a price-setting firm has the following total revenue and total cost functions: R(q) =...

Suppose that a price-setting firm has the following total revenue and total cost functions: R(q) = 10.75q – 0.1875q2 and C(q) = 75 + 0.07q + 0.035q2 . This firm faces downward sloping demand and marginal revenue curves. Marginal revenue and marginal cost are given by ?? ?? = ??(?) = 10.75 – 0.375? and ?? ?? = ??(?) = 0.07 + 0.07?, respectively. a. Using the marginal revenue function given above, find an expression for the firm’s demand curve...

11. A perfectly competitive firm is producing at the point where its marginal cost equals its marginal revenue. If the firm boosts its output, its total revenue will

11. A perfectly competitive firm is producing at the point where its marginal cost equals its marginal revenue. If the firm boosts its output, its total revenue willA) rise and its total variable cost will rise even more.B) rise and its total variable cost will rise, but not by as much.C) fall but its total variable cost will rise.D) fall and its total variable cost will fall, but not by as much.12. Bob's Lawn Care Services is a perfectly competitive...

Subjects