Question

A professional services firm is investigating yield management as a means of taking advantage of unused capacity. Analysts for this firm estimate a demand curve for the firm's service, which is sold by the hour. Points on this demand curve include 9000 hours at the current rate of $60 per hour, 9500 hours at $55, 10,000 hours at $50, and 10,500 hours at $45. Based on this demand curve, what price point would be best for the firm, if its objective is maximum revenue?

Answer 1

Given, points on demand curve include 9000 hours at the current rate of $60 per hour, 9500 hours at $55, 10,000 hours at $50, and 10,500 hours at $45. On the basis of this information we can calculate the yields of these price points:

Price	Revenue
$60	60X9000=$540,000
$55	55X9500=$522,500
$50	50X10000=500,000
$45	45X10500=472,500

We can see in the above table that as the firm is lowering its price, the revenue is also decreasing, i.e., the demand is inelastic. So, the firm should not lower its price as it is not increasing the revenue. With decrease in prices, the demand is increasing which will help the firm to utilize some unused capacity, but the revenue is decreasing, so, it is suggested to the firm that it should not lower its price, if its objective is to maximize revenue.