4. Given the elasticity, determine whether increasing/decreasing the price will increase/decrease the revenue for a firm....

4. Given the elasticity, determine whether increasing/decreasing the price will increase/decrease the revenue for a firm. For instance, let's say that the price elasticity of demand is -2 between P=8 and P=10. Would a firm's revenue increase if it raises its price from 8 to 10? If you already know the price elasticity, this question does not require calculation.

Solutions

Expert Solution

Assuming that the price elasticity of demand = -2 in the price range of $8 to $10.(the actual value of elasticity cannot be found with the given information; the quantity demanded at each of the prices is required to calculate the same)

As the absolute value of elasticity is greater than 1, the demand for the given product is elastic in nature in the given price range.

Therefore, for any change in the price of the product, the change in the quantity of the product demanded is higher.

a. When the price of the good is increased, the quantity of the good demanded decreases by a higher proportion and hence the total revenue decreases.

b. When the price of the good is decreased, the quantity of the good demanded increases by a higher proportion and hence the total revenue increases.

(Note: If the price elasticity of demand has an absolute value of less than 1, then the demand is inelastic. In such a case, increasing(decreasing) prices leads to an increase(decrease) in the total revenue)

If the firm raises the price of the good from $8 to $10, while the demand is elastic, the total revenue decreases.

Rahul Sunny answered 1 year ago

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