Answer to Question #206924 in Microeconomics for Aitazaz

Question

a. A two-year-old study indicate that the price elasticity of demand for internet was about 1.3. If a 10MB connection currently costs PKR 2000 a month and the Transworld wants to increase its revenue by 10% should it increase or decrease its price.

b. Due to the Covid situation the people are stuck at home and have nothing to do much except online engagement. Should the PED of users stay same or change? Why?

Answer 1

a.

The price elasticity of demand for the internet is 1.3

Price elasticity is greater than 1, which means the price elasticity of demand is elastic in nature.

When price elasticity of demand is elastic in nature, change in price leads to a proportionally larger change in quantity demanded.

Thus, it is suggested to Transworld to decrease the price.

Decreasing the price would result in a proportionally large increase in quantity demanded, thus resulting in increasing the total revenue.

b.

Price elasticity of demand would decrease.

One of the factors that affect the price elasticity of demand is dependency.

Larger the dependency of an individual on the good or service, the lesser the price elasticity.

As because of Covid's situation the people are stuck at home and have nothing to do much except online engagement, their dependence on internet service has increased. Thus even when Transworld increases the price, the decline in quantity demanded would be proportionally lesser. This means the price elasticity of demand would decrease and thus may even become inelastic in nature.