Explain the relationship between elasticity, total revenue, and marginal revenue. If you have a new product...

Explain the relationship between elasticity, total revenue, and marginal revenue. If you have a new product in the market, will you set the product price in the elastic or inelastic area? Why?

Solutions

Expert Solution

In case of higher elasticity, higher the price lower the total revenue and lower the price higher the revenue.

In case of inelastic good, higher the price higher the total revenue and lower the price lower the total revenue.

Refer the attached picture.

We can see from the above graph the revenue is maximum when it is unitary elastic and in the elastic region with the decrease in price the total revenue increases while in case of inelastic region the total revenue increases with the increase in total revenue.

In case of new product if there is no close substitute available in the market then we must set the price in the elastic region so that we are able to maximize our profit. That is similar to monopoly. Due to non-avaibility of substitute we can charge a higher price and book a larger profit. Later on when substitutes are available then we will have to charge in the inelastic region.

Initially we charge in the elastic region as no substitute is available and hence no competition.

Rahul Sunny answered 1 year ago

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