Question

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company’s product at the current price is 1.4, would you advise the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were 0.6? What if it were 1? Explain your answer.

Answer 1

Answer - If the elasticity of demand will be 1.4 , this means that , if price is decreased , quantity demanded will rise by larger amount . Hence here the price needs to be decreased , in order to increased the total revenue. If price will be increased , demand and TR will fall. Hence price should be decreased and not increased.

If elasticity is 0.6 , the raising of price will lead to very small fall in demand. Hence the price of good can be raised in order to increased the total revenue.

If elasticity is 1 , the price should not be changed. Because , any change in price will have same effect on quantity and hence TOtal revenue will not change. Thus when Ed is 1 , then price should not be changed.