Answer to Question #181997 in Microeconomics for Kay

Question

Suppose you are the producer of spinach, carrots and beetroot and you are in a position to decide at which price you will offer these products for sale. What will be your pricing strategy for each of these products in order to increase the total revenue? In your analysis you found that the price elasticity of demand for spinach is 0,4, for carrots is 1,0 and for beetroot is 1,2. Explain your decision in each case.

Answer 1

Some of the pricing strategies that I will use to increase total revenue include: penetrating, skimming, and following. Penetrating involves setting a low price, leaving most of the value in the hands of the customers and shutting off margin from competitors.

My decision is so because, if the demand for my products is highly elastic, cutting prices should lead to an increase in revenue. Increasing prices will lead to a fall in revenue. If demand is price inelastic, then I can increase my profits by increasing the price.