Question

In: Economics

Bob owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made...

Bob owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. If she wants to increase her total revenue, what advice will you give her?

  • A. increase her price, because demand is elastic, increasing the price will increase the total revenue.
  • B. increase her price, because demand is inelastic, increasing the price will increase the total revenue.
  • C. lower her price, because demand is elastic, lowering the price will increase the total revenue.
  • D. lower her price, because demand is inelastic, lowering the price will increase the total revenue.

Solutions

Expert Solution

As we can see we have :-

Price of Chocolate = $10

Elasticity = 2.5

As,

Elasticity = 2.5 > 1

So, We have a Elastic Demand

So, Option B and Option D will be wrong as they say that Demand is Inelastic.

We know,

As, Elasticity = 2.5

So, We can see that % change in quantity is 2.5 times of % Change in Price.

So, % Change in quantity demand is greater than % Change in Price.

Hence, Any increase in Price will decrease the Demand even faster and hence will decrease the Total Revenue.

While with any decrease in Price will increase the Demand at even faster rate and hence will increase the Total Revenue.

So,

With Elastic Demand, Decrease in Price will increase the Total Revenue.

Hence,

Option C. lower her price, because demand is elastic, lowering the price will increase the total revenue is correct


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