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.

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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