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If the price for the monthly Netflix subscription fees went from $10 to $12 and the...

If the price for the monthly Netflix subscription fees went from $10 to $12 and the demand for tickets fell from 200 million to only 160 million. What will be the price elasticity of demand for Netflix? Would you recommend that the Netflix raise prices again? Why? show work and explain for full credit.

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Answer #1

% change in Quantity demanded=(Q2-Q1)/Average * 100
Average=(Q2+Q1)/2=(160+200)/2=180
% change in Quantity demanded=(160-200)/180*100=-22.22%

% change in Quantity demanded=(P2-P1)/Average * 100
Average=(P2+P1)/2=(10+12)/2=11
% change in Quantity demanded=(12-10)/11 * 100=18.18

Price elasticity of demand=% change in Quantity demanded/% change in price
Ep=-22.22/18.18=-1.2

Since the elassticity is greater than 1 this means that the demand is quite elastic.A further increase in price would decrease demand by a greater amount and the total revenue would fall.Thus, a price rise is not recommended.

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