Question

Laury’s Merchandising custom prints logos onto coffee mugs. The firm currently sells it most popular style for $10 and has a marginal cost (including a blank mug and the printing) of $6. Jess recently ran an experiment and determined her demand elasticity is -5.

a. Should Laury raise or lower her price? Explain your answer.

b. Are there any other elasticities she should consider as it she sets a new price?

Answer 1

a)

Laury should LOWER her price .

Price Elasticity of demand for Laury's merchandise is -5 which indicates that demand is ELASTIC. Demand is said to be price elastic when percentage change in quantity demanded is more than percentage change in price. As such, a given percentage increase in price will lead to a greater percentage decrease in Quantity demanded and hence total revenue will decrease. Hence, increasing price would not benefit Laury as it would decrease her total revenue. If she lowers her price then total revenue will increase. As demand is Elastic, a given percentage decrease in price will lead to a greater percentage increase in quantity demanded and hence total revenue will increase. Hence, decreasing price would benefit Laury as her total revenue will increase. Hence, Laury should lower her price.

b)

No other Elasticities should be considered while as she sets her new price.

Only Price Elasticity of demand should be considered while setting a new price. This is because price Elasticity of demand gives a relationship between price and quantity demanded. As such, by how much the Quantity demanded and hence total revenue will increase or decrease can be determined with a given increase or decrease in price . Any other Elasticities establish a relationship between Quantity demanded and other factors other than the price. As such, taking these into consideration will not help us know the impact of price change on Quantity demanded and total revenue.