Answer to Question #190187 in Microeconomics for Addo Benjamin

Question

Justina owns the Just’s Sobolo Store. She charges GHS10 per bottle for her handmade sobolo. You, the economist calculated the elasticity of demand for sobolo in her town to be 2.5. If she wants to increase her total revenue, what advice will you give her and why? Be able to explain your answer. 

Answer 1

Solution:

The elasticity of demand of 2.5 for sobolo suggests that the product is highly elastic since it is greater than one. The demand for sobolo is highly sensitive to price changes, that is the quantity demanded of the product will drastically change when its price increases or decreases.

I will advise Justina not to increase the price of her sobolo product. This is because doing that will drastically reduce the total revenue due to loss of sales resulting from low demand.

Since total revenue is price times the quantity of a good. If demand is highly elastic at a specific price, then Justina should cut the price of the sobolo product, since the percentage drop in price will result in an even greater percentage increase in the quantity sold, hence raising the total revenue.