Answer to Question #67746 in Microeconomics for xoli

Question

Suppose you are the managing director of a firm that supplies three goods: laptops, usb drives and external hard drives. The price elasticity of the deman for laptops is 2.0; for USB drives it is 1.00; and for external hard drives it is 0.53. The firm is experiencing serious cash flow problems and you have to increase total revenue as soon as possible.you are in a position to set the prices for these goods. What would your pricing strategy for each product? Motivate your decisions

Answer 1

As by definition, total revenue (TR) is obtained by multiplying quantity demanded of a product (Qx) by price (Px), that is
TR=Q×P,
so we have to increase the price or quantity demanded.
When good’s demand is elastic (Ke>1), as it happens with laptops (Ke=2.0) , the price decreasing leads to quantity increasing in a greater extent, and total revenue rises. So, it is expediently to decrease the price for laptops.
When Ke=1, as it happens with USB drives, it doesn’t matter how the price changes: the quantity demanded changes in the same extent, and total revenue doesn’t change. So, there is no any difference whether to increase the price or reduce.
When good’s demand is inelastic (Ke<1), as it happens with external hard drives (Ke=0.53), the price decreasing leads to quantity increasing in a smaller extent, and total revenue falls, and vice versa. So, it is expediently to increase the price for external drives.