Question

In: Economics

you are the curator of a museum. the museum is running short of funds, so you...

you are the curator of a museum. the museum is running short of funds, so you decided to increase revenue. should you increase or decrease the price of admission? explain

Solutions

Expert Solution

It depends on the elasticity of demand for the museum visits. In economics, there is a strong relation between total revenue and elasticity of demand.

Total revenue is the amount received by the firm by selling goods. (Price*Quantity)

Elasticity of demand is the degree of responsiveness to change in quantity demand due to change in the price of good (%change in quantity demanded / % change in price)

The relation between total revenue and elasticity of demand is:

  • When demand is inelastic (e<1): A rise in price leads to a rise in total revenue. (Inelastic demand means, when there is a large change in price, but quantity demanded changes by a very small amount).
  • When demand is elastic (e>1): A fall in price leads to a rise in total revenue (elastic demand means, when there is a small change in price, but quantity demanded changes by a large amount).
  • When demand is unit elastic (e=1): A change in price leads to no change in total revenue (unit elastic demand means when price changes, the quantity demanded changes in the same proportion which keeps the tootal revenue constant).

Therefore, the museum can decide whether to increase or decrease the price depending upon its elasticity of demand.


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