Question

Suppose you are the manager of a firm that produces three goods: R, S and T....

Suppose you are the manager of a firm that produces three goods: R, S and T. The price Elasticity of demand for R is 1.2, for S it is 1.00 and for T it is 0.75. The firm experience serious cash flow problems and you have to increase total revenue as soon as possible. if you were in a position to set the price for the goods. what would be your pricing strategy for each product? provide reasons for your answers.

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Answer #1

Since absolute value of elasticity of demand for good R is higher than 1, its demand is elastic.

Since absolute value of elasticity of demand for good S is equal to 1, its demand is unit elastic.

Since absolute value of elasticity of demand for good T is lower than 1, its demand is inelastic.

The more inelastic (elastic) the demand for a good, the less (more) responsive its quantity demanded is to a change in price. Therefore, when a good is elastic (inelastic), total revenue increases if its price decreases (increases). Accordingly, price of good R should be decreased and price of good T should be increased to raise total revenue. Since good S has unit elastic, demand, a change in its price will keep its revenue unchanged.

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