Question

Carol owns a dry cleaning business with no other competition in town. She hires you as a consultant to ask how she can raise revenues. You tell her to increase the price of dry cleaning a suit from $4 to $5 and decrease the price of cleaning a sweater from $3 to $2.

a. Why did you give Carol this recommendation?

b. Would you offer the same recommendations if Carol asked you to help increase profits instead of revenues?

Answer 1

(a) Demand for dry cleaning a suit is inelastic, therefore an increase in its price will increase revenue in this segment. On the other hand, demand for cleaning a sweater is elastic, therefore a decrease in its price will increase revenue in this segment. Together, a price rise for dry cleaning of suits and a price cut for cleaning sweaters will increase total revenue.

(b) I would have given the same suggestion for profit increase. Since profit is the difference between total revenue and total cost, when total revenue increases, cost structure remaining unchanged, profit increases.