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

If the elasticity is 1.4 at current prices, you would advice the company to reduce its price on the product. A decrease in price will be offset by the increase in the total units of the drug sold. If the elasticity was 0.6, you would advice the company to increase its price, since increase in the price will offset the decrease in the total amounts sold and increase the revenue. If elasticity is 1, you would recommend the company to maintain its current price level beacuse the total revenue is already maximized.

 

Price elasticity is a mesasure of how sensitive quantity demanded or supplied of a product is to its price.