Question

Jordan is in charge of a product line for a large company, and the firm has market power in this product category. At the current price, demand is estimated to be -0.5. How should Jordan adjust the price to increase profits? What must be true about the elasticity at the profit-maximizing price? Please provide an explanation, 2-5 sentences. Provide graphs and/or examples to illustrate where this would be helpful.  

Answer 1

When the price elasticity of demand is -0.5 then it means that the price elasticity of demand is inelastic as it is less than 1.

When the demand is inelastic, the firm can increase its price because it will bring in more revenue as the demand will not change by the same proportion and therefore the firm can make more profits by increasing its prices by charging more prices on consumers having an inelastic demand.

Example of goods having inelastic demand is gasoline because no matter what the price is,the demand will be the same as people consider it as a necessity in daily transportation and so an increase in price will not change the demand by the same proportion and therefore increasing the price will bring in more revenue and increase profits.