Question

You are the city manager and need to improve the total revenue of the services provided to the area residents. Your services include water, garbage collection, and electricity.

You are well aware of the inverse relationship between prices charged by the city and the level of these services used. Using the elasticity concept explain, in detail, how you would go about raising the city’s revenue from these services.

Answer 1

Since elasticity measures the responsiveness of the quantity demaned due to change in the prices. So when the percentage change in the quantity demand is less than the percentage change in the price, then the demand is said to be inelastic, while when the percentage change in the quantity demand is more than the percentage change in the price, then the demand is said to be elastic.

Hence when the demand for services of water, garbage collection, and electricity are inelastic, the effect of price on the quantity demand of these services will be less, so when the price is increased of these services, the quantity demand is decreased by less percentage. Hence the with the increase in the price of these services, the total revenue increases.

Therefore with the increase in the price of these services, the total revenue can be increased of the city.