Answer to Question #182012 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

Price elasticity of demand for spinach is 0.4 - Spinach price elasticity is inelastic in nature which means a price increase would lead to a proportionally smaller decline in quantity demanded thus when the price is increased, total revenue would increase. Thus the price of spinach must be increased to increase total revenue.

Price elasticity for carrots is 1.0 - Carrots price elasticity is unitary elastic in nature which means a price increase would lead to a proportionally equal decline in quantity demanded thus when the price is increased, total revenue would remain the same. Thus increasing or decreasing the price of carrots would not matter as total revenue would not change.

Price elasticity for beetroot is 1.2 - Beetroot price elasticity is elastic in nature which means a price increase would lead to a proportionally larger decline in quantity demanded thus when the price is increased, total revenue would decrease. Similarly, if the price of beetroot is decreased, it would lead to a proportionally larger increase in quantity demanded, thus increasing total revenue. Thus the price of beetroot must be decreased to increase total revenue.